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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Kelly Partners Group Holdings (ASX:KPG) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Kelly Partners Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = AU$24m ÷ (AU$192m - AU$48m) (Based on the trailing twelve months to December 2024).
So, Kelly Partners Group Holdings has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 16%.
See our latest analysis for Kelly Partners Group Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kelly Partners Group Holdings' ROCE against it's prior returns. If you're interested in investigating Kelly Partners Group Holdings' past further, check out this free graph covering Kelly Partners Group Holdings' past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Kelly Partners Group Holdings doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 17%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Kelly Partners Group Holdings' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Kelly Partners Group Holdings is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 1,361% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.