When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Unique Fabricating (NYSEMKT:UFAB), we've spotted some signs that it could be struggling, so let's investigate.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Unique Fabricating is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0088 = US$799k ÷ (US$114m - US$23m) (Based on the trailing twelve months to September 2020).
Thus, Unique Fabricating has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 10%.
Above you can see how the current ROCE for Unique Fabricating 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 Unique Fabricating here for free.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Unique Fabricating. Unfortunately the returns on capital have diminished from the 14% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Unique Fabricating to turn into a multi-bagger.
What We Can Learn From Unique Fabricating's ROCE
In summary, it's unfortunate that Unique Fabricating is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 30% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Unique Fabricating (of which 1 can't be ignored!) that you should know about.
While Unique Fabricating isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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