uCloudlink Group (NASDAQ:UCL) Is Very Good At Capital Allocation

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at the ROCE trend of uCloudlink Group (NASDAQ:UCL) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on uCloudlink Group is:

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

0.22 = US$4.1m ÷ (US$56m - US$38m) (Based on the trailing twelve months to March 2024).

Thus, uCloudlink Group has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

See our latest analysis for uCloudlink Group

In the above chart we have measured uCloudlink Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for uCloudlink Group .

What Does the ROCE Trend For uCloudlink Group Tell Us?

It's great to see that uCloudlink Group has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 22% which is no doubt a relief for some early shareholders. In regards to capital employed, uCloudlink Group is using 52% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. uCloudlink Group could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 67% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In summary, it's great to see that uCloudlink Group has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 81% over the last three years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

uCloudlink Group does have some risks though, and we've spotted 3 warning signs for uCloudlink Group that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

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