Returns On Capital Are Showing Encouraging Signs At Kennametal India (NSE:KENNAMET)

Simply Wall St
November 10, 2021
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Kennametal India (NSE:KENNAMET) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Kennametal India:

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

0.20 = ₹1.2b ÷ (₹7.8b - ₹1.9b) (Based on the trailing twelve months to September 2021).

Thus, Kennametal India has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 14% it's much better.

See our latest analysis for Kennametal India

NSEI:KENNAMET Return on Capital Employed November 11th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kennametal India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kennametal India, check out these free graphs here.

So How Is Kennametal India's ROCE Trending?

Investors would be pleased with what's happening at Kennametal India. The data shows that returns on capital have increased substantially over the last five years to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 51% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Kennametal India's ROCE

All in all, it's terrific to see that Kennametal India is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 104% to shareholders over the last year, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Kennametal India, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Kennametal India may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.