Here's What's Concerning About UNIBEP's (WSE:UNI) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think UNIBEP (WSE:UNI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on UNIBEP is:

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

0.063 = zł34m ÷ (zł1.6b - zł1.0b) (Based on the trailing twelve months to September 2021).

Thus, UNIBEP has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.

Check out our latest analysis for UNIBEP

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

What Does the ROCE Trend For UNIBEP Tell Us?

When we looked at the ROCE trend at UNIBEP, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.1% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, UNIBEP's current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On UNIBEP's ROCE

Bringing it all together, while we're somewhat encouraged by UNIBEP's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with UNIBEP and understanding these should be part of your investment process.

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. 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.