Slowing Rates Of Return At KION GROUP (ETR:KGX) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at KION GROUP (ETR:KGX) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.058 = €720m ÷ (€18b - €5.6b) (Based on the trailing twelve months to September 2024).

Therefore, KION GROUP has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.1%.

View our latest analysis for KION GROUP

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 for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at KION GROUP. Over the past five years, ROCE has remained relatively flat at around 5.8% and the business has deployed 28% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From KION GROUP's ROCE

In summary, KION GROUP has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 42% in the last five years. Therefore based on the analysis done in this article, we don't think KION GROUP has the makings of a multi-bagger.

KION GROUP does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.