Here's What's Concerning About Københavns Lufthavne's (CPH:KBHL) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Københavns Lufthavne (CPH:KBHL) 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)

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 Københavns Lufthavne:

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

0.059 = kr.840m ÷ (kr.16b - kr.1.6b) (Based on the trailing twelve months to March 2024).

Thus, Københavns Lufthavne has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 11%.

Check out our latest analysis for Københavns Lufthavne

Historical performance is a great place to start when researching a stock so above you can see the gauge for Københavns Lufthavne's ROCE against it's prior returns. If you'd like to look at how Københavns Lufthavne has performed in the past in other metrics, you can view this free graph of Københavns Lufthavne's past earnings, revenue and cash flow.

What Can We Tell From Københavns Lufthavne's ROCE Trend?

In terms of Københavns Lufthavne's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 13% five years ago. 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Københavns Lufthavne is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 19% over 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.

One more thing to note, we've identified 2 warning signs with Københavns Lufthavne and understanding them should be part of your investment process.

While Københavns Lufthavne isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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