Returns On Capital At Keywords Studios (LON:KWS) Have Hit The Brakes

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. With that in mind, the ROCE of Keywords Studios (LON:KWS) looks decent, right now, so lets see what the trend of returns can tell us.

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

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

0.10 = €75m ÷ (€938m - €215m) (Based on the trailing twelve months to June 2023).

Thus, Keywords Studios has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 11%.

See our latest analysis for Keywords Studios

Above you can see how the current ROCE for Keywords Studios compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Keywords Studios here for free.

What Can We Tell From Keywords Studios' ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 286% more capital in the last five years, and the returns on that capital have remained stable at 10%. 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.

What We Can Learn From Keywords Studios' ROCE

In the end, Keywords Studios has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 11%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Keywords Studios does have some risks though, and we've spotted 4 warning signs for Keywords Studios 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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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.