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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. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into UNITEDLABELS (ETR:ULC), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for UNITEDLABELS:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0026 = €28k ÷ (€22m - €11m) (Based on the trailing twelve months to September 2022).
So, UNITEDLABELS has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 17%.
Check out our latest analysis for UNITEDLABELS
Historical performance is a great place to start when researching a stock so above you can see the gauge for UNITEDLABELS' ROCE against it's prior returns. If you'd like to look at how UNITEDLABELS has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is UNITEDLABELS' ROCE Trending?
In terms of UNITEDLABELS' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.3% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on UNITEDLABELS becoming one if things continue as they have.
On a side note, UNITEDLABELS has done well to pay down its current liabilities to 49% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.