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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Kratos Defense & Security Solutions (NASDAQ:KTOS), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Kratos Defense & Security Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0053 = US$6.9m ÷ (US$1.6b - US$245m) (Based on the trailing twelve months to March 2023).
Thus, Kratos Defense & Security Solutions has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 9.9%.
View our latest analysis for Kratos Defense & Security Solutions
Above you can see how the current ROCE for Kratos Defense & Security Solutions 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 Kratos Defense & Security Solutions here for free.
How Are Returns Trending?
On the surface, the trend of ROCE at Kratos Defense & Security Solutions doesn't inspire confidence. Around five years ago the returns on capital were 2.1%, but since then they've fallen to 0.5%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Kratos Defense & Security Solutions' ROCE
While returns have fallen for Kratos Defense & Security Solutions in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.