If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Kenon Holdings (TLV:KEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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. The formula for this calculation on Kenon Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = US$59m ÷ (US$4.2b - US$224m) (Based on the trailing twelve months to March 2025).
So, Kenon Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 2.5%.
See our latest analysis for Kenon Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kenon Holdings' ROCE against it's prior returns. If you're interested in investigating Kenon Holdings' past further, check out this free graph covering Kenon Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Kenon Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 3.5%, but since then they've fallen to 1.5%. However it looks like Kenon Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Kenon Holdings' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 371% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know more about Kenon Holdings, we've spotted 2 warning signs, and 1 of them is significant.
While Kenon Holdings 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. 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.