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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Kitwave Group (LON:KITW), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Kitwave Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = UK£29m ÷ (UK£359m - UK£141m) (Based on the trailing twelve months to October 2024).
Thus, Kitwave Group has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Consumer Retailing industry.
See our latest analysis for Kitwave Group
Above you can see how the current ROCE for Kitwave Group 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 Kitwave Group for free.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 20% five years ago, while the business's capital employed increased by 348%. That being said, Kitwave Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Kitwave Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Additionally, we found that Kitwave Group's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
On a side note, Kitwave Group has done well to pay down its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.