What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating KION GROUP (ETR:KGX), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 KION GROUP:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = €648m ÷ (€15b - €4.5b) (Based on the trailing twelve months to June 2021).
Therefore, KION GROUP has an ROCE of 6.3%. On its own, that's a low figure but it's around the 7.2% average generated by the Machinery industry.
In the above chart we have measured KION GROUP's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering KION GROUP here for free.
The Trend Of ROCE
In terms of KION GROUP's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.1% over the last five years. 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.
While returns have fallen for KION GROUP in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 96% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
On a separate note, we've found 1 warning sign for KION GROUP you'll probably want to know about.
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