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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while Kimberly-Clark (NYSE:KMB) has a high ROCE right now, lets see what we can decipher from how returns are changing.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Kimberly-Clark, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$2.9b ÷ (US$17b - US$6.6b) (Based on the trailing twelve months to June 2023).
Thus, Kimberly-Clark has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
View our latest analysis for Kimberly-Clark
Above you can see how the current ROCE for Kimberly-Clark compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kimberly-Clark here for free.
What Can We Tell From Kimberly-Clark's ROCE Trend?
On the surface, the trend of ROCE at Kimberly-Clark doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 41% where it was five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Kimberly-Clark's ROCE
In summary, Kimberly-Clark is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Like most companies, Kimberly-Clark does come with some risks, and we've found 4 warning signs that you should be aware of.