Why We Like The Returns At Kinetic Mines and Energy (HKG:1277)

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Kinetic Mines and Energy (HKG:1277) looks great, so lets see what the trend can tell us.

What is 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. To calculate this metric for Kinetic Mines and Energy, this is the formula:

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

0.43 = CN¥1.2b ÷ (CN¥3.7b - CN¥855m) (Based on the trailing twelve months to December 2020).

So, Kinetic Mines and Energy has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 6.1%.

See our latest analysis for Kinetic Mines and Energy

Above you can see how the current ROCE for Kinetic Mines and Energy 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 Kinetic Mines and Energy here for free.

What The Trend Of ROCE Can Tell Us

Kinetic Mines and Energy is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 43%. The amount of capital employed has increased too, by 233%. So we're very much inspired by what we're seeing at Kinetic Mines and Energy thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Kinetic Mines and Energy's ROCE

All in all, it's terrific to see that Kinetic Mines and Energy is reaping the rewards from prior investments and is growing its capital base. And a remarkable 381% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 1 warning sign for Kinetic Mines and Energy that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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