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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Koppers Holdings (NYSE:KOP) so let's look a bit deeper.
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 Koppers Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$187m ÷ (US$1.6b - US$267m) (Based on the trailing twelve months to March 2021).
Thus, Koppers Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.1% generated by the Chemicals industry.
See our latest analysis for Koppers Holdings
In the above chart we have measured Koppers Holdings' 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 report for Koppers Holdings.
So How Is Koppers Holdings' ROCE Trending?
Investors would be pleased with what's happening at Koppers Holdings. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 65% more capital is being employed now too. So we're very much inspired by what we're seeing at Koppers Holdings thanks to its ability to profitably reinvest capital.
What We Can Learn From Koppers Holdings' ROCE
In summary, it's great to see that Koppers Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 13% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to know some of the risks facing Koppers Holdings we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.