Stock Analysis

Returns On Capital At KCP (NSE:KCP) Have Stalled

NSEI:KCP
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of KCP (NSE:KCP) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on KCP is:

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

0.15 = ₹2.2b ÷ (₹20b - ₹4.8b) (Based on the trailing twelve months to December 2020).

Thus, KCP has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Basic Materials industry average of 13%.

Check out our latest analysis for KCP

roce
NSEI:KCP Return on Capital Employed June 10th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for KCP's ROCE against it's prior returns. If you'd like to look at how KCP has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From KCP's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 32% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that KCP has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

The main thing to remember is that KCP has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 25% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if KCP is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for KCP (of which 1 is concerning!) that you should know about.

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. 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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