Stock Analysis

Here's What To Make Of Keller Group's (LON:KLR) Decelerating Rates Of Return

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LSE:KLR
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Keller Group (LON:KLR), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Keller Group, this is the formula:

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

0.13 = UK£95m ÷ (UK£1.3b - UK£592m) (Based on the trailing twelve months to June 2021).

Therefore, Keller Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Construction industry.

Check out our latest analysis for Keller Group

roce
LSE:KLR Return on Capital Employed March 6th 2022

In the above chart we have measured Keller Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Keller Group here for free.

How Are Returns Trending?

Over the past five years, Keller Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Keller Group doesn't end up being a multi-bagger in a few years time. This probably explains why Keller Group is paying out 39% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Another thing to note, Keller Group has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Keller Group's ROCE

We can conclude that in regards to Keller Group's returns on capital employed and the trends, there isn't much change to report on. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Keller Group you'll probably want to know about.

While Keller Group 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.

Valuation is complex, but we're helping make it simple.

Find out whether Keller Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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