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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Kinepolis Group (EBR:KIN), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.065 = €64m ÷ (€1.2b - €194m) (Based on the trailing twelve months to December 2022).

Therefore, Kinepolis Group has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 13%.

View our latest analysis for Kinepolis Group

In the above chart we have measured Kinepolis 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 report for Kinepolis Group.

What Does the ROCE Trend For Kinepolis Group Tell Us?

When we looked at the ROCE trend at Kinepolis Group, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Kinepolis Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 10% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Kinepolis Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.