Knaus Tabbert (ETR:KTA) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Knaus Tabbert (ETR:KTA), it didn't seem to tick all of these boxes.

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 Knaus Tabbert:

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

0.084 = €22m ÷ (€535m - €270m) (Based on the trailing twelve months to September 2022).

Thus, Knaus Tabbert has an ROCE of 8.4%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

Our analysis indicates that KTA is potentially undervalued!

In the above chart we have measured Knaus Tabbert'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 Knaus Tabbert.

How Are Returns Trending?

On the surface, the trend of ROCE at Knaus Tabbert doesn't inspire confidence. Over the last four years, returns on capital have decreased to 8.4% from 36% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Knaus Tabbert's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Knaus Tabbert's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 35% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Knaus Tabbert has the makings of a multi-bagger.

Knaus Tabbert does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those shouldn't be ignored...

While Knaus Tabbert 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.