Be Wary Of UPA Corporation Berhad (KLSE:UPA) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think UPA Corporation Berhad (KLSE:UPA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for UPA Corporation Berhad, this is the formula:

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

0.028 = RM7.7m ÷ (RM296m - RM21m) (Based on the trailing twelve months to December 2020).

Thus, UPA Corporation Berhad has an ROCE of 2.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.2%.

See our latest analysis for UPA Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for UPA Corporation Berhad's ROCE against it's prior returns. If you're interested in investigating UPA Corporation Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From UPA Corporation Berhad's ROCE Trend?

On the surface, the trend of ROCE at UPA Corporation Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.8% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

What We Can Learn From UPA Corporation Berhad's ROCE

We're a bit apprehensive about UPA Corporation Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 28% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing UPA Corporation Berhad we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While UPA Corporation Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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