Keyrus (EPA:ALKEY) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Keyrus (EPA:ALKEY), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Keyrus, this is the formula:

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

0.065 = €11m ÷ (€344m - €179m) (Based on the trailing twelve months to June 2022).

Therefore, Keyrus has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

See our latest analysis for Keyrus

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

What Can We Tell From Keyrus' ROCE Trend?

On the surface, the trend of ROCE at Keyrus doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. 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.

On a side note, Keyrus has done well to pay down its current liabilities to 52% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 52% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Keyrus. These growth trends haven't led to growth returns though, since the stock has fallen 26% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Keyrus does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

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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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.