When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. 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.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for United-Guardian:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = US$3.4m ÷ (US$12m - US$1.9m) (Based on the trailing twelve months to March 2023).
Thus, United-Guardian has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 13%.
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're interested in investigating United-Guardian's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For United-Guardian Tell Us?
There is reason to be cautious about United-Guardian, given the returns are trending downwards. To be more specific, the ROCE was 47% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect United-Guardian to turn into a multi-bagger.
Our Take On United-Guardian's ROCE
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 41% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing: We've identified 4 warning signs with United-Guardian (at least 2 which can't be ignored) , and understanding these would certainly be useful.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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