- Saudi Arabia
- Specialty Stores
United Electronics (TADAWUL:4003) Looks To Prolong Its Impressive Returns
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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over United Electronics' (TADAWUL:4003) trend of ROCE, we really liked 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. The formula for this calculation on United Electronics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = ر.س484m ÷ (ر.س4.0b - ر.س1.7b) (Based on the trailing twelve months to December 2022).
So, United Electronics has an ROCE of 21%. While that is an outstanding return, the rest of the Specialty Retail industry generates similar returns, on average.
See our latest analysis for United Electronics
Above you can see how the current ROCE for United Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering United Electronics here for free.
What Does the ROCE Trend For United Electronics Tell Us?
We'd be pretty happy with returns on capital like United Electronics. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 230% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
On a side note, United Electronics has done well to reduce current liabilities to 42% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.
The Key Takeaway
In short, we'd argue United Electronics 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 done incredibly well with a 125% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know more about United Electronics, we've spotted 4 warning signs, and 2 of them can't be ignored.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
United Electronics Company, together with its subsidiaries, engages in the wholesale and retail operations in the Kingdom of Saudi Arabia and internationally.
Reasonable growth potential and fair value.