Returns On Capital Are Showing Encouraging Signs At Kenmare Resources (LON:KMR)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Kenmare Resources (LON:KMR) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Kenmare Resources:

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

0.16 = US$168m ÷ (US$1.1b - US$69m) (Based on the trailing twelve months to June 2022).

Thus, Kenmare Resources has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Metals and Mining industry.

See our latest analysis for Kenmare Resources

In the above chart we have measured Kenmare Resources' 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 Kenmare Resources.

What Does the ROCE Trend For Kenmare Resources Tell Us?

Kenmare Resources has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 733% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

In summary, we're delighted to see that Kenmare Resources has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 115% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Kenmare Resources can keep these trends up, it could have a bright future ahead.

Kenmare Resources does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.