Returns On Capital Signal Difficult Times Ahead For United-Guardian (NASDAQ:UG)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at United-Guardian (NASDAQ:UG), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for United-Guardian, this is the formula:

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

0.25 = US$2.7m ÷ (US$12m - US$1.5m) (Based on the trailing twelve months to September 2023).

So, United-Guardian has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 14%.

Check out our latest analysis for United-Guardian

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of United-Guardian, check out these free graphs here.

What Does the ROCE Trend For United-Guardian Tell Us?

In terms of United-Guardian's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 47% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 United-Guardian to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that United-Guardian is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 47% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about United-Guardian, we've spotted 4 warning signs, and 1 of them is concerning.

United-Guardian is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.