Stock Analysis

Returns On Capital Signal Tricky Times Ahead For Brd. Klee (CPH:KLEE B)

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CPSE:KLEE B
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Brd. Klee (CPH:KLEE B), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Brd. Klee is:

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

0.081 = kr.8.2m ÷ (kr.133m - kr.31m) (Based on the trailing twelve months to September 2020).

Therefore, Brd. Klee has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.

See our latest analysis for Brd. Klee

roce
CPSE:KLEE B Return on Capital Employed April 18th 2021

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Brd. Klee doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Brd. Klee have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 32% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Brd. Klee (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While Brd. Klee may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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