Kewal Kiran Clothing's (NSE:KKCL) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Kewal Kiran Clothing (NSE:KKCL), 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. To calculate this metric for Kewal Kiran Clothing, this is the formula:

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

0.081 = ₹361m ÷ (₹6.3b - ₹1.8b) (Based on the trailing twelve months to June 2021).

Therefore, Kewal Kiran Clothing has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

See our latest analysis for Kewal Kiran Clothing

In the above chart we have measured Kewal Kiran Clothing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kewal Kiran Clothing here for free.

What The Trend Of ROCE Can Tell Us

In terms of Kewal Kiran Clothing's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Kewal Kiran Clothing's ROCE

Bringing it all together, while we're somewhat encouraged by Kewal Kiran Clothing's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Kewal Kiran Clothing you'll probably want to know about.

While Kewal Kiran Clothing 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.
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