Kabel Deutschland Holding (HMSE:KD8) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Kabel Deutschland Holding (HMSE:KD8) looks great, so lets see what the trend can tell us.

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 Kabel Deutschland Holding:

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

0.36 = €858m ÷ (€4.2b - €1.8b) (Based on the trailing twelve months to March 2021).

So, Kabel Deutschland Holding has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Media industry average of 11%.

Check out our latest analysis for Kabel Deutschland Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kabel Deutschland Holding's ROCE against it's prior returns. If you're interested in investigating Kabel Deutschland Holding's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kabel Deutschland Holding's ROCE Trend?

The trends we've noticed at Kabel Deutschland Holding are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Kabel Deutschland Holding's ROCE

In summary, it's great to see that Kabel Deutschland Holding can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 5.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Kabel Deutschland Holding does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.