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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Kumba Iron Ore's (JSE:KIO) look very promising so lets take 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 Kumba Iron Ore is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = R29b ÷ (R87b - R12b) (Based on the trailing twelve months to June 2023).
Therefore, Kumba Iron Ore has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.
Check out our latest analysis for Kumba Iron Ore
In the above chart we have measured Kumba Iron Ore's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kumba Iron Ore here for free.
How Are Returns Trending?
Investors would be pleased with what's happening at Kumba Iron Ore. The data shows that returns on capital have increased substantially over the last five years to 38%. The amount of capital employed has increased too, by 38%. So we're very much inspired by what we're seeing at Kumba Iron Ore thanks to its ability to profitably reinvest capital.
The Bottom Line On Kumba Iron Ore's ROCE
All in all, it's terrific to see that Kumba Iron Ore is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, Kumba Iron Ore does come with some risks, and we've found 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.