Keywords Studios (LON:KWS) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Keywords Studios (LON:KWS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Keywords Studios:

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

0.11 = €58m ÷ (€677m - €143m) (Based on the trailing twelve months to December 2021).

Thus, Keywords Studios has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.4% generated by the IT industry.

View our latest analysis for Keywords Studios

In the above chart we have measured Keywords Studios' 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 Keywords Studios.

What Can We Tell From Keywords Studios' ROCE Trend?

When we looked at the ROCE trend at Keywords Studios, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 18% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Keywords Studios is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 166% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Keywords Studios it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Keywords Studios 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. 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.