Returns On Capital - An Important Metric For KEO (CSE:KEO)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in KEO's (CSE:KEO) returns on capital, so let's have a look.

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 KEO is:

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

0.037 = €2.8m ÷ (€88m - €11m) (Based on the trailing twelve months to June 2020).

So, KEO has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 11%.

Check out our latest analysis for KEO

Historical performance is a great place to start when researching a stock so above you can see the gauge for KEO's ROCE against it's prior returns. If you're interested in investigating KEO's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For KEO Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 126%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 27% less capital than it was five years ago. KEO may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From KEO's ROCE

In summary, it's great to see that KEO has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 3 warning signs for KEO that we think you should be aware of.

While KEO 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. 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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