There Are Reasons To Feel Uneasy About Kinepolis Group's (EBR:KIN) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Kinepolis Group (EBR:KIN), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Kinepolis Group is:

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

0.07 = €68m ÷ (€1.2b - €194m) (Based on the trailing twelve months to December 2022).

So, Kinepolis Group has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 13%.

See our latest analysis for Kinepolis Group

Above you can see how the current ROCE for Kinepolis Group 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 Kinepolis Group here for free.

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

In terms of Kinepolis Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% 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 Kinepolis Group. And there could be an opportunity here if other metrics look good too, because the stock has declined 20% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Kinepolis Group does have some risks though, and we've spotted 1 warning sign for Kinepolis Group that you might be interested in.

While Kinepolis Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.