If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at UE Furniture (SHSE:603600) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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 UE Furniture:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥241m ÷ (CN¥3.1b - CN¥987m) (Based on the trailing twelve months to September 2023).
Thus, UE Furniture has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 5.4% it's much better.
See our latest analysis for UE Furniture
In the above chart we have measured UE Furniture's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for UE Furniture.
What Can We Tell From UE Furniture's ROCE Trend?
The trends we've noticed at UE Furniture are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 89% more capital is being employed now too. So we're very much inspired by what we're seeing at UE Furniture thanks to its ability to profitably reinvest capital.
In Conclusion...
To sum it up, UE Furniture has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 92% 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. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 2 warning signs facing UE Furniture that you might find interesting.
While UE Furniture may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
