United Nilgiri Tea Estates (NSE:UNITEDTEA) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at United Nilgiri Tea Estates (NSE:UNITEDTEA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.058 = ₹96m ÷ (₹1.7b - ₹94m) (Based on the trailing twelve months to December 2020).

Therefore, United Nilgiri Tea Estates has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

See 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're interested in investigating United Nilgiri Tea Estates' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at United Nilgiri Tea Estates doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for United Nilgiri Tea Estates. However, despite the promising trends, the stock has fallen 38% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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. 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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