I am writing today to help inform people who are new to the stock market and want to begin learning the link between Kesko Oyj (HEL:KESKOB)’s return fundamentals and stock market performance.
If you purchase a KESKOB share you are effectively becoming a partner with many other shareholders. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to KESKOB’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Kesko Oyj is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
ROCE: Explanation and Calculation
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Kesko Oyj is good at growing investor capital. Take a look at the formula box beneath:
ROCE Calculation for KESKOB
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €273.70m ÷ (€4.50b – €2.24b) = 12.08%
As you can see, KESKOB earned €12.1 from every €100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which KESKOB has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.
Then why have investors invested?
Kesko Oyj’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Kesko Oyj is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that KESKOB’s ROCE has risen from 7.75%, indicating the company’s capital returns have stengthened. Over the same period, EBT went from €198.20m to €273.70m and the amount of capital employed fell in response to a larger reliance on current liabilities (more borrowed money) , which is an indication that Kesko Oyj has increased the ROCE for investors by producing more earnings and using less capital.
ROCE for KESKOB investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. Kesko Oyj’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for KESKOB’s future growth? Take a look at our free research report of analyst consensus for KESKOB’s outlook.
- Valuation: What is KESKOB worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether KESKOB is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.