Capital Investment Trends At Kainos Group (LON:KNOS) Look Strong

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. That's why when we briefly looked at Kainos Group's (LON:KNOS) ROCE trend, we were very happy with what we saw.

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. To calculate this metric for Kainos Group, this is the formula:

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

0.38 = UK£54m ÷ (UK£268m - UK£127m) (Based on the trailing twelve months to September 2023).

So, Kainos Group has an ROCE of 38%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.

Check out our latest analysis for Kainos Group

Above you can see how the current ROCE for Kainos Group 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 Does the ROCE Trend For Kainos Group Tell Us?

We'd be pretty happy with returns on capital like Kainos Group. The company has consistently earned 38% for the last five years, and the capital employed within the business has risen 206% in that time. Now considering ROCE is an attractive 38%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Kainos Group can keep this up, we'd be very optimistic about its future.

On a side note, Kainos Group's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In short, we'd argue Kainos Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 179% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

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

Kainos Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.