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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at KION GROUP (ETR:KGX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. To calculate this metric for KION GROUP, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = €739m ÷ (€18b - €5.1b) (Based on the trailing twelve months to June 2024).
Therefore, KION GROUP has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.
Check out our latest analysis for KION GROUP
In the above chart we have measured KION GROUP's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for KION GROUP .
What Can We Tell From KION GROUP's ROCE Trend?
In terms of KION GROUP's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.8% from 7.3% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On KION GROUP's ROCE
To conclude, we've found that KION GROUP is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to continue researching KION GROUP, you might be interested to know about the 2 warning signs that our analysis has discovered.