Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Kerry Logistics Network (HKG:636), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kerry Logistics Network:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = HK$2.8b ÷ (HK$49b - HK$12b) (Based on the trailing twelve months to June 2020).
Therefore, Kerry Logistics Network has an ROCE of 7.7%. Even though it's in line with the industry average of 7.7%, it's still a low return by itself.
Above you can see how the current ROCE for Kerry Logistics Network 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 Kerry Logistics Network here for free.
What Does the ROCE Trend For Kerry Logistics Network Tell Us?
The returns on capital haven't changed much for Kerry Logistics Network in recent years. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
In summary, Kerry Logistics Network has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 68% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 4 warning signs for Kerry Logistics Network you'll probably want to know about.
While Kerry Logistics Network 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. 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.
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