Returns On Capital Signal Tricky Times Ahead For KION GROUP (ETR:KGX)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think KION GROUP (ETR:KGX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 KION GROUP is:

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

0.022 = €255m ÷ (€17b - €5.5b) (Based on the trailing twelve months to September 2022).

So, KION GROUP has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.0%.

Check out the opportunities and risks within the DE Machinery industry.

Above you can see how the current ROCE for KION GROUP compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for KION GROUP.

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 5.4% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On KION GROUP's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for KION GROUP. And there could be an opportunity here if other metrics look good too, because the stock has declined 53% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for KION GROUP (3 don't sit too well with us) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.