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UP Global Sourcing Holdings plc (LON:UPGS) Is Employing Capital Very Effectively

Today we are going to look at UP Global Sourcing Holdings plc (LON:UPGS) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for UP Global Sourcing Holdings:

0.54 = UK£5.8m ÷ (UK£35m – UK£24m) (Based on the trailing twelve months to July 2018.)

Therefore, UP Global Sourcing Holdings has an ROCE of 54%.

Check out our latest analysis for UP Global Sourcing Holdings

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Does UP Global Sourcing Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, UP Global Sourcing Holdings’s ROCE is meaningfully higher than the 16% average in the Retail Distributors industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, UP Global Sourcing Holdings’s ROCE is currently very good.

In our analysis, UP Global Sourcing Holdings’s ROCE appears to be 54%, compared to 3 years ago, when its ROCE was 35%. This makes us think the business might be improving.

LSE:UPGS Last Perf January 14th 19
LSE:UPGS Last Perf January 14th 19

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How UP Global Sourcing Holdings’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

UP Global Sourcing Holdings has total liabilities of UK£24m and total assets of UK£35m. Therefore its current liabilities are equivalent to approximately 69% of its total assets. UP Global Sourcing Holdings’s high level of current liabilities boost the ROCE – but its ROCE is still impressive.

The Bottom Line On UP Global Sourcing Holdings’s ROCE

So we would be interested in doing more research here — there may be an opportunity! You might be able to find a better buy than UP Global Sourcing Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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