Klöckner & Co (ETR:KCO) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Klöckner & Co (ETR:KCO) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Klöckner & Co:

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

0.04 = €72m ÷ (€2.9b - €1.1b) (Based on the trailing twelve months to March 2021).

Thus, Klöckner & Co has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 9.6%.

View our latest analysis for Klöckner & Co

In the above chart we have measured Klöckner & Co'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 Klöckner & Co.

What Does the ROCE Trend For Klöckner & Co Tell Us?

Shareholders will be relieved that Klöckner & Co has broken into profitability. The company now earns 4.0% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

Our Take On Klöckner & Co's ROCE

To bring it all together, Klöckner & Co has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 12% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Klöckner & Co does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Klöckner & Co 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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