Returns On Capital At Kelsian Group (ASX:KLS) Paint A Concerning Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Kelsian Group (ASX:KLS) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 2 warning signs investors should be aware of before investing in Kelsian Group. Read for free now.

What Is 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. Analysts use this formula to calculate it for Kelsian Group:

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

0.057 = AU$121m ÷ (AU$2.5b - AU$377m) (Based on the trailing twelve months to December 2024).

Thus, Kelsian Group has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 7.4%.

View our latest analysis for Kelsian Group

In the above chart we have measured Kelsian 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 Kelsian Group .

What Can We Tell From Kelsian Group's ROCE Trend?

On the surface, the trend of ROCE at Kelsian Group doesn't inspire confidence. To be more specific, ROCE has fallen from 9.1% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kelsian Group. These trends are starting to be recognized by investors since the stock has delivered a 0.3% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a separate note, we've found 2 warning signs for Kelsian Group you'll probably want to 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.