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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Universal Store Holdings (ASX:UNI), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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 Store Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = AU$32m ÷ (AU$224m - AU$55m) (Based on the trailing twelve months to December 2021).
Therefore, Universal Store Holdings has an ROCE of 19%. By itself that's a normal return on capital and it's in line with the industry's average returns of 19%.
Above you can see how the current ROCE for Universal Store Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Universal Store Holdings here for free.
What Does the ROCE Trend For Universal Store Holdings Tell Us?
Things have been pretty stable at Universal Store Holdings, with its capital employed and returns on that capital staying somewhat the same for the last one year. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Universal Store Holdings to be a multi-bagger going forward. That being the case, it makes sense that Universal Store Holdings has been paying out 62% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
The Bottom Line
In a nutshell, Universal Store Holdings has been trudging along with the same returns from the same amount of capital over the last one year. Since the stock has declined 38% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Universal Store Holdings has the makings of a multi-bagger.
If you'd like to know about the risks facing Universal Store Holdings, we've discovered 1 warning sign that you should be aware of.
While Universal Store Holdings 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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