United Nilgiri Tea Estates (NSE:UNITEDTEA) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at United Nilgiri Tea Estates (NSE:UNITEDTEA), it didn't seem to tick all of these boxes.

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. To calculate this metric for United Nilgiri Tea Estates, this is the formula:

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

0.046 = ₹82m ÷ (₹1.8b - ₹54m) (Based on the trailing twelve months to September 2021).

Therefore, United Nilgiri Tea Estates has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

Check out our latest analysis for United Nilgiri Tea Estates

Historical performance is a great place to start when researching a stock so above you can see the gauge for United Nilgiri Tea Estates' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of United Nilgiri Tea Estates, check out these free graphs here.

So How Is United Nilgiri Tea Estates' ROCE Trending?

When we looked at the ROCE trend at United Nilgiri Tea Estates, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 14% five years ago. However it looks like United Nilgiri Tea Estates might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On United Nilgiri Tea Estates' ROCE

Bringing it all together, while we're somewhat encouraged by United Nilgiri Tea Estates' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching United Nilgiri Tea Estates, you might be interested to know about the 2 warning signs that our analysis has discovered.

While United Nilgiri Tea Estates isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.