We're Watching These Trends At Ultrafabrics HoldingsLtd (TYO:4235)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Ultrafabrics HoldingsLtd (TYO:4235), it didn't seem to tick all of these boxes.

What is 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 Ultrafabrics HoldingsLtd, this is the formula:

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

0.019 = JP¥394m ÷ (JP¥28b - JP¥7.6b) (Based on the trailing twelve months to September 2020).

Therefore, Ultrafabrics HoldingsLtd has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.3%.

View our latest analysis for Ultrafabrics HoldingsLtd

In the above chart we have measured Ultrafabrics HoldingsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ultrafabrics HoldingsLtd.

The Trend Of ROCE

On the surface, the trend of ROCE at Ultrafabrics HoldingsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Ultrafabrics HoldingsLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 71% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 5 warning signs with Ultrafabrics HoldingsLtd (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Ultrafabrics HoldingsLtd 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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