If we are to find a title that could multiply over the long term, what are the underlying trends to look for? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in line with growth amount capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. However, after investigation UPERGY Public Limited Company (EPA: ALUPG), we don’t think the current trends fit the mold of a multi-bagger.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for UPERGY Société Anonyme:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.012 = 215 K € ÷ (29 M € – 10 M €) (Based on the last twelve months up to December 2020).

Thereby, UPERGY Société Anonyme posted a ROCE of 1.2%. In absolute terms, this is a low return and it is also below the industry average for commercial distributors of 13%.

See our latest analysis for UPERGY Société Anonyme

ENXTPA: ALUPG Review of the capital employed September 30, 2021

Historical performance is a great place to start when looking for a stock. You can therefore see above the gauge of the ROCE of UPPERGY Société Anonyme compared to its previous returns. If you would like to see how UPERGY Société Anonyme has performed in the past in other metrics, you can see this free graph of past income, income and cash flow.

The ROCE trend

On the surface, the ROCE trend at UPERGY Société Anonyme does not inspire confidence. To be more precise, ROCE has increased by 22% over the past five years. However, it appears that UPPERGY Société Anonyme is reinvesting for long-term growth because while capital employed has increased, the company’s sales haven’t changed much in the past 12 months. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.

By the way, UPERGY Société Anonyme has done well to reduce its current liabilities to 36% of total assets. This could partly explain the drop in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money.

Our opinion on the ROCE of UPPERGY Société Anonyme

In summary, UPERGY Société Anonyme is reinvesting funds in the business for growth, but unfortunately it seems that sales have not increased much yet. And over the past five years, the stock has fallen 19%, so the market doesn’t seem overly bullish that these trends will strengthen anytime soon. Overall, we’re not too inspired by the underlying trends and think there might be more chances to find a multi-bagger elsewhere.

On a final note, we found 3 warning signs for UPERGY Société Anonyme (2 are significant) you should be aware of.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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