UFO Moviez India (NSE:UFO) Could Be Struggling To Allocate Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at UFO Moviez India (NSE:UFO), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on UFO Moviez India is:

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

0.066 = ₹262m ÷ (₹5.4b - ₹1.5b) (Based on the trailing twelve months to March 2024).

So, UFO Moviez India has an ROCE of 6.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

View our latest analysis for UFO Moviez India

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how UFO Moviez India has performed in the past in other metrics, you can view this free graph of UFO Moviez India's past earnings, revenue and cash flow.

What Can We Tell From UFO Moviez India's ROCE Trend?

In terms of UFO Moviez India's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 17% five years ago but has since fallen to 6.6%. In addition to that, UFO Moviez India is now employing 32% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

In Conclusion...

To see UFO Moviez India reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 6.9% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

UFO Moviez India does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While UFO Moviez India 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com