Keyera (TSE:KEY) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Keyera (TSE:KEY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Keyera:

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

0.066 = CA$472m ÷ (CA$8.2b - CA$1.1b) (Based on the trailing twelve months to September 2021).

Therefore, Keyera has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.5% average generated by the Oil and Gas industry.

Check out our latest analysis for Keyera

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

How Are Returns Trending?

On the surface, the trend of ROCE at Keyera doesn't inspire confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 6.6%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Keyera's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Keyera is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 2.2% 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.

Keyera does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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

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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