The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between KUKA Aktiengesellschaft (FRA:KU2)’s return fundamentals and stock market performance.
Buying KUKA makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to KU2’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently KUKA is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
ROCE: Explanation and Calculation
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at KUKA’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for KU2
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €83m ÷ (€3.3b – €1.4b) = 4.4%
As you can see, KU2 earned €4.4 from every €100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which KU2 has missed by a wide margin, meaning the company creates a poor amount of earnings from capital employed.
What is causing this?
KUKA’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment KUKA is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that KU2’s ROCE has deteriorated from 16%, indicating the company’s capital returns have declined. With this, the current earnings of €83m actually declined from €119m whilst capital employed has increased due to an increase in total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
KU2’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. KUKA’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for KU2’s future growth? Take a look at our free research report of analyst consensus for KU2’s outlook.
- Valuation: What is KU2 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether KU2 is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.