The Return Trends At United Drilling Tools (NSE:UNIDT) Look Promising

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, United Drilling Tools (NSE:UNIDT) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on United Drilling Tools is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = ₹374m ÷ (₹2.9b - ₹446m) (Based on the trailing twelve months to September 2022).

Therefore, United Drilling Tools has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 6.8% it's much better.

Check out our latest analysis for United Drilling Tools

Historical performance is a great place to start when researching a stock so above you can see the gauge for United Drilling Tools' ROCE against it's prior returns. If you'd like to look at how United Drilling Tools has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is United Drilling Tools' ROCE Trending?

The trends we've noticed at United Drilling Tools are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 139% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 15% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From United Drilling Tools' ROCE

All in all, it's terrific to see that United Drilling Tools is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 36% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

United Drilling Tools does have some risks though, and we've spotted 4 warning signs for United Drilling Tools that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.