Unite and Grow (TSE:4486) Looks To Prolong Its Impressive Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Unite and Grow's (TSE:4486) ROCE trend, we were very happy with what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Unite and Grow:

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).

So, 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 16%.

See 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're interested in investigating Unite and Grow's past further, check out this free graph covering Unite and Grow's past earnings, revenue and cash flow.

What Can We Tell From Unite and Grow's ROCE Trend?

It's hard not to be impressed by Unite and Grow's returns on capital. The company has employed 185% more capital in the last five years, and the returns on that capital have remained stable at 22%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Unite and Grow has done well to reduce current liabilities to 28% of total assets over the last five years. 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. However, despite the favorable fundamentals, the stock has fallen 44% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a final note, we've found 2 warning signs for Unite and Grow that we think you should be aware of.

Unite and Grow is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.