What Do The Returns On Capital At Keyrus (EPA:KEY) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Keyrus (EPA:KEY) 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 Keyrus is:

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

0.076 = €11m ÷ (€324m - €176m) (Based on the trailing twelve months to June 2020).

Thus, Keyrus has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

Check out 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.

How Are Returns Trending?

When we looked at the ROCE trend at Keyrus, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Keyrus' current liabilities are still rather high at 54% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, Keyrus is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 54% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 4 warning signs for Keyrus (2 are concerning) you should be aware of.

While Keyrus 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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