Is Københavns Lufthavne (CPH:KBHL) Likely To Turn Things Around?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Københavns Lufthavne (CPH:KBHL) 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 Københavns Lufthavne is:

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

0.0034 = kr.46m ÷ (kr.15b - kr.1.3b) (Based on the trailing twelve months to September 2020).

So, Københavns Lufthavne has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 6.2%.

See our latest analysis for Københavns Lufthavne

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Københavns Lufthavne, check out these free graphs here.

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

On the surface, the trend of ROCE at Københavns Lufthavne doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 0.3%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Københavns Lufthavne's diminishing returns on increasing amounts of capital. However the stock has delivered a 66% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Københavns Lufthavne, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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