What Do The Returns On Capital At UEX (TYO:9888) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think UEX (TYO:9888) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on UEX is:

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

0.025 = JP¥450m ÷ (JP¥40b - JP¥22b) (Based on the trailing twelve months to December 2020).

Thus, UEX has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.4%.

Check out our latest analysis for UEX

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

The Trend Of ROCE

When we looked at the ROCE trend at UEX, we didn't gain much confidence. Around five years ago the returns on capital were 4.9%, but since then they've fallen to 2.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, UEX's current liabilities are still rather high at 55% of total assets. 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.

The Bottom Line On UEX's ROCE

Bringing it all together, while we're somewhat encouraged by UEX's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing UEX we've found 5 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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