- Oops!Something went wrong.Please try again later.
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 United-Guardian (NASDAQ:UG), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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. The formula for this calculation on United-Guardian is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$3.6m ÷ (US$12m - US$1.4m) (Based on the trailing twelve months to December 2020).
So, United-Guardian has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for United-Guardian's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of United-Guardian, check out these free graphs here.
How Are Returns Trending?
We're a bit concerned with the trends, because the business is applying 29% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. But we have to give it to United-Guardian because the returns on the capital it is employing are still high in relative terms.
The Bottom Line On United-Guardian's ROCE
It's a shame to see that United-Guardian is effectively shrinking in terms of its capital base. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a separate note, we've found 2 warning signs for United-Guardian you'll probably want to know about.
United-Guardian is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.