Returns Are Gaining Momentum At Kingsgate Consolidated (ASX:KCN)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Kingsgate Consolidated (ASX:KCN) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.14 = AU$14m ÷ (AU$127m - AU$32m) (Based on the trailing twelve months to June 2023).

Thus, Kingsgate Consolidated has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Metals and Mining industry.

Check out our latest analysis for Kingsgate Consolidated

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Kingsgate Consolidated has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kingsgate Consolidated's ROCE Trend?

Kingsgate Consolidated has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 14% which is a sight for sore eyes. In addition to that, Kingsgate Consolidated is employing 67% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Kingsgate Consolidated's ROCE

In summary, it's great to see that Kingsgate Consolidated has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 581% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Kingsgate Consolidated can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Kingsgate Consolidated we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Kingsgate Consolidated isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.