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Are UniVision Engineering Limited’s (LON:UVEL) High Returns Really That Great?

Simply Wall St

Today we'll look at UniVision Engineering Limited (LON:UVEL) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

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. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for UniVision Engineering:

0.22 = UK£1.9m ÷ (UK£12m - UK£3.5m) (Based on the trailing twelve months to March 2019.)

Therefore, UniVision Engineering has an ROCE of 22%.

View our latest analysis for UniVision Engineering

Is UniVision Engineering's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. UniVision Engineering's ROCE appears to be substantially greater than the 12% average in the Electronic 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, UniVision Engineering's ROCE is currently very good.

We can see that , UniVision Engineering currently has an ROCE of 22% compared to its ROCE 3 years ago, which was 3.1%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how UniVision Engineering's ROCE compares to its industry, and you can click it to see more detail on its past growth.

AIM:UVEL Past Revenue and Net Income, September 7th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If UniVision Engineering is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How UniVision Engineering'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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

UniVision Engineering has total assets of UK£12m and current liabilities of UK£3.5m. As a result, its current liabilities are equal to approximately 29% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

The Bottom Line On UniVision Engineering's ROCE

With low current liabilities and a high ROCE, UniVision Engineering could be worthy of further investigation. UniVision Engineering shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.