Capital Investments At Unite and Grow (TSE:4486) Point To A Promising Future

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Unite and Grow (TSE:4486), we liked what we saw.

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

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. To calculate this metric for Unite and Grow, this is the formula:

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

0.22 = JP¥411m ÷ (JP¥2.6b - JP¥715m) (Based on the trailing twelve months to March 2024).

Thus, Unite and Grow has an ROCE of 22%. In absolute terms that's a great return and it's even better than the IT industry average of 15%.

View our latest analysis for Unite and Grow

Historical performance is a great place to start when researching a stock so above you can see the gauge for Unite and Grow's ROCE against it's prior returns. If you'd like to look at how Unite and Grow has performed in the past in other metrics, you can view this free graph of Unite and Grow's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unite and Grow deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 185% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 28% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Unite and Grow's ROCE

In short, we'd argue Unite and Grow has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 41% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Unite and Grow we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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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.