Return Trends At Kingfisher (LON:KGF) Aren't Appealing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of Kingfisher (LON:KGF) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kingfisher, this is the formula:

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

0.10 = UK£946m ÷ (UK£12b - UK£3.2b) (Based on the trailing twelve months to January 2021).

Therefore, Kingfisher has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

View our latest analysis for Kingfisher

Above you can see how the current ROCE for Kingfisher 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.

What Can We Tell From Kingfisher's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 29% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

The main thing to remember is that Kingfisher has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 28% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Kingfisher that you might find interesting.

While Kingfisher 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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This article by Simply Wall St is general in nature. 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.
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