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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in UET United Electronic Technology's (ETR:CFC) returns on capital, so let's have a look.
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. The formula for this calculation on UET United Electronic Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €6.8m ÷ (€54m - €9.0m) (Based on the trailing twelve months to June 2023).
So, UET United Electronic Technology has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Communications industry.
View our latest analysis for UET United Electronic Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for UET United Electronic Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of UET United Electronic Technology, check out these free graphs here.
So How Is UET United Electronic Technology's ROCE Trending?
The fact that UET United Electronic Technology is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 15% on its capital. In addition to that, UET United Electronic Technology is employing 122% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Key Takeaway
In summary, it's great to see that UET United Electronic Technology has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 68% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.