Returns On Capital At urban-gro (NASDAQ:UGRO) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at urban-gro (NASDAQ:UGRO) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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 urban-gro:

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

0.0037 = US$186k ÷ (US$68m - US$18m) (Based on the trailing twelve months to September 2021).

So, urban-gro has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

See our latest analysis for urban-gro

Above you can see how the current ROCE for urban-gro compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for urban-gro.

So How Is urban-gro's ROCE Trending?

There hasn't been much to report for urban-gro's returns and its level of capital employed because both metrics have been steady for the past . This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect urban-gro to be a multi-bagger going forward.

Our Take On urban-gro's ROCE

In summary, urban-gro isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 54% over the last year, 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.

If you want to know some of the risks facing urban-gro we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While urban-gro 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. 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.