Uma Converter (NSE:UMA) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Having said that, from a first glance at Uma Converter (NSE:UMA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Uma Converter:

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

0.089 = ₹89m ÷ (₹1.8b - ₹843m) (Based on the trailing twelve months to September 2024).

Therefore, Uma Converter has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.

View our latest analysis for Uma Converter

Historical performance is a great place to start when researching a stock so above you can see the gauge for Uma Converter's ROCE against it's prior returns. If you're interested in investigating Uma Converter's past further, check out this free graph covering Uma Converter's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Uma Converter's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 8.9%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Uma Converter has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Uma Converter's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Uma Converter is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Uma Converter does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Uma Converter 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.