Stock Analysis

Here's What To Make Of Keller Group's (LON:KLR) Returns On Capital

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LSE:KLR
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Keller Group (LON:KLR), it didn't seem to tick all of these boxes.

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. 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)

0.11 = UK£99m ÷ (UK£1.4b - UK£546m) (Based on the trailing twelve months to June 2020).

Therefore, Keller Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 12%.

Check out our latest analysis for Keller Group

roce
LSE:KLR Return on Capital Employed January 3rd 2021

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 to see what analysts are forecasting going forward, you should check out our free report for Keller Group.

How Are Returns Trending?

In terms of Keller Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Keller Group's ROCE

Bringing it all together, while we're somewhat encouraged by Keller Group's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 2.8% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, Keller Group does come with some risks, and we've found 4 warning signs that you should be aware of.

While Keller Group 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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