UniFirst (NYSE:UNF) Might Be Having Difficulty Using Its Capital Effectively

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at UniFirst (NYSE:UNF), it didn't seem to tick all of these boxes.

Understanding 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 UniFirst is:

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

0.069 = US$165m ÷ (US$2.7b - US$270m) (Based on the trailing twelve months to May 2024).

Thus, UniFirst has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

See our latest analysis for UniFirst

In the above chart we have measured UniFirst's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for UniFirst .

How Are Returns Trending?

When we looked at the ROCE trend at UniFirst, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 6.9%. However it looks like UniFirst might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On UniFirst's ROCE

To conclude, we've found that UniFirst is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 2.8% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

UniFirst could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for UNF on our platform quite valuable.

While UniFirst 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.