Returns On Capital Signal Tricky Times Ahead For Kenon Holdings (TLV:KEN)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Kenon Holdings (TLV:KEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. 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$57m ÷ (US$4.0b - US$308m) (Based on the trailing twelve months to June 2024).

So, Kenon Holdings has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 3.5%.

Check out 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 Does the ROCE Trend For Kenon Holdings Tell Us?

In terms of Kenon Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.5% from 2.3% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Kenon Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 172% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Kenon Holdings does have some risks though, and we've spotted 2 warning signs for Kenon Holdings that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.