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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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Kingsgate Consolidated (ASX:KCN) looks great, so lets see what the trend can tell us.
What Is 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 Kingsgate Consolidated, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = AU$22m ÷ (AU$142m - AU$58m) (Based on the trailing twelve months to December 2023).
Therefore, Kingsgate Consolidated has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 11%.
See our latest analysis for Kingsgate Consolidated
Above you can see how the current ROCE for Kingsgate Consolidated 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 Kingsgate Consolidated for free.
What Does the ROCE Trend For Kingsgate Consolidated Tell Us?
Kingsgate Consolidated has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 27% on its capital. In addition to that, Kingsgate Consolidated is employing 509% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, Kingsgate Consolidated has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.