Returns On Capital Are Showing Encouraging Signs At Universal Display (NASDAQ:OLED)

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Universal Display (NASDAQ:OLED) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Universal Display:

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

0.14 = US$217m ÷ (US$1.7b - US$119m) (Based on the trailing twelve months to December 2023).

Thus, Universal Display has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Semiconductor industry.

Check out our latest analysis for Universal Display

Above you can see how the current ROCE for Universal Display 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 analyst report for Universal Display .

How Are Returns Trending?

Investors would be pleased with what's happening at Universal Display. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 94%. So we're very much inspired by what we're seeing at Universal Display thanks to its ability to profitably reinvest capital.

Our Take On Universal Display's ROCE

In summary, it's great to see that Universal Display can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

Universal Display does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.