Returns On Capital At Uni-Select (TSE:UNS) Paint An Interesting Picture
When we want to find a potential multi-excavator, there are often underlying trends that can provide clues. Ideally, a company shows two trends. First, a growing return on capital employed (ROCE) and, second, an increasing amount of capital employed. When you see this, it usually means that it is a company with a great business model and numerous profitable reinvestment opportunities. However, after a quick look at the numbers, we don't believe Uni-Select (TSE: UNS) has what it takes to be a multi-excavator, but let's see why that is.
Understanding the return on investment (ROCE)
To make it clear whether you are not sure, ROCE is a measure of how much pre-tax income a company earns (in percent) with the capital invested in its business. The formula for this calculation in Uni-Select is:
Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets - current liabilities)
0.03 = $ 32 million ÷ ($ 1.4 billion - $ 307 million) (based on the last twelve months through June 2020).
Uni-Select therefore has a ROCE of 3.0%. In absolute terms, this is a low return and is also below the 16% industry average for retail distributors.
Check out our latest analysis for Uni-Select
In the graph above, we measured Uni-Select's previous ROCE based on previous performance, but the future is arguably more important. If you want to see which analysts are forecasting for the future, you should read our free report for Uni-Select.
What the ROCE trend can tell us
ROCE's trend doesn't look fantastic as it has fallen from 16% five years ago while the company's capital employed has increased 119%. However, some of the increase in capital employed could be due to the recent fundraising that was completed prior to the most recent reporting period. So keep that in mind when looking at the ROCE decline. The funds ingested have probably not yet been used. It is therefore worthwhile to observe what will happen to the earnings of Uni-Select in the future and whether they will change due to the capital increase.
In this context, Uni-Select has reduced its short-term liabilities to 23% of the balance sheet total. This could partly explain why the ROCE has decreased. Additionally, this can reduce some aspects of the risk to the company as the company's suppliers or short-term creditors now fund less of its business. Since the company is basically funding a greater chunk of its business with its own money, it could be argued that this has made the business less efficient at generating ROCE.
The conclusion of the ROCE from Uni-Select
All in all, although we are somewhat encouraged by Uni-Select's reinvestment in its own business, we are aware that returns are shrinking. It seems that investors have little hope that these trends will improve, and that this has in part contributed to the stock plunging 77% over the past five years. Based on the analysis carried out in this article, we therefore do not believe that Uni-Select has what it takes to be a multi-excavator.
If you want to learn more about Uni-Select, we have discovered two warning signs, one of which cannot be ignored.
If you're looking for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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