Under The Bonnet, uCloudlink Group's (NASDAQ:UCL) Returns Look Impressive
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in uCloudlink Group's (NASDAQ:UCL) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for uCloudlink Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.45 = US$5.7m ÷ (US$49m - US$36m) (Based on the trailing twelve months to March 2023).
Thus, uCloudlink Group has an ROCE of 45%. That's a fantastic return and not only that, it outpaces the average of 8.2% earned by companies in a similar industry.
View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We're delighted to see that uCloudlink Group is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 45% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 77%. 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. The current liabilities has increased to 74% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Bottom Line
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. Although the company may be facing some issues elsewhere since the stock has plunged 79% in the last three years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
On a final note, we found 2 warning signs for uCloudlink Group (1 is concerning) you should be aware of.
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.
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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