Flour Mills Kepenos SA (ATH:KEPEN): Assessing Capital Returns

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Flour Mills Kepenos SA (ATH:KEPEN) stock.

Purchasing Flour Mills Kepenos gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in Flour Mills Kepenos, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

See our latest analysis for Flour Mills Kepenos

ROCE: Explanation and Calculation

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine Flour Mills Kepenos’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). KEPEN’s ROCE is calculated below:

ROCE Calculation for KEPEN

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = €287k ÷ (€40m – €6.0m) = 2.5%

The calculation above shows that KEPEN’s earnings were 2.5% of capital employed. This makes Flour Mills Kepenos disappointing when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital may be able to compound over time, but not to standard that investors should be aiming for.

ATSE:KEPEN Last Perf December 6th 18
ATSE:KEPEN Last Perf December 6th 18

What is causing this?

Although Flour Mills Kepenos is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that KEPEN weakened investor return on capital employed from 12%. In this time, earnings have fallen from €2.4m to €287k and capital employed has increased due to an increase in total assets and decrease in current liabilities (less borrowed money) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

KEPEN’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability. Flour Mills Kepenos’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for KEPEN’s future growth? Take a look at our free research report of analyst consensus for KEPEN’s outlook.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Flour Mills Kepenos’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.