Kogan.com's (ASX:KGN) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kogan.com (ASX:KGN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kogan.com is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.041 = AU$12m ÷ (AU$440m - AU$162m) (Based on the trailing twelve months to June 2021).

So, Kogan.com has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 21%.

View our latest analysis for Kogan.com

In the above chart we have measured Kogan.com'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 report for Kogan.com.

What Can We Tell From Kogan.com's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 22% five years ago, while the business's capital employed increased by 3,601%. Usually this isn't ideal, but given Kogan.com conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Kogan.com might not have received a full period of earnings contribution from it.

On a side note, Kogan.com has done well to pay down its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Kogan.com's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kogan.com. And the stock has done incredibly well with a 684% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Kogan.com does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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