United Drilling Tools (NSE:UNIDT) Is Reinvesting To Multiply In Value

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of United Drilling Tools (NSE:UNIDT) looks attractive right now, so lets see what the trend of returns can tell us.

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. Analysts use this formula to calculate it for United Drilling Tools:

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

0.24 = ₹477m ÷ (₹2.3b - ₹343m) (Based on the trailing twelve months to June 2021).

Therefore, United Drilling Tools has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

View 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.

What Can We Tell From United Drilling Tools' ROCE Trend?

In terms of United Drilling Tools' history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 114% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 15% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

United Drilling Tools has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 57% return if they held over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

United Drilling Tools does have some risks though, and we've spotted 1 warning sign for United Drilling Tools that you might be interested in.

United Drilling Tools is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.

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