There Are Reasons To Feel Uneasy About Københavns Lufthavne's (CPH:KBHL) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after investigating Københavns Lufthavne (CPH:KBHL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Københavns Lufthavne:

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

0.0042 = kr.60m ÷ (kr.15b - kr.1.1b) (Based on the trailing twelve months to June 2022).

Therefore, Københavns Lufthavne has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 8.4%.

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're interested in investigating Københavns Lufthavne's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Københavns Lufthavne, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 0.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Københavns Lufthavne's ROCE

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. In light of this, the stock has only gained 11% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Københavns Lufthavne (of which 2 are potentially serious!) that you should know about.

While Københavns Lufthavne 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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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.