Returns At Kenmare Resources (LON:KMR) Are On The Way Up

By
Simply Wall St
Published
August 20, 2021
LSE:KMR
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Kenmare Resources (LON:KMR) and its trend of ROCE, we really liked what we saw.

What is 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. The formula for this calculation on Kenmare Resources is:

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

0.031 = US$34m ÷ (US$1.1b - US$55m) (Based on the trailing twelve months to December 2020).

Thus, Kenmare Resources has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 17%.

View our latest analysis for Kenmare Resources

roce
LSE:KMR Return on Capital Employed August 21st 2021

Above you can see how the current ROCE for Kenmare Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We're delighted to see that Kenmare Resources is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.1% on its capital. In addition to that, Kenmare Resources is employing 107% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Kenmare Resources has decreased current liabilities to 4.8% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

To the delight of most shareholders, Kenmare Resources has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 61% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Kenmare Resources does have some risks though, and we've spotted 2 warning signs for Kenmare Resources that you might be interested in.

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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