Stock Analysis

Returns On Capital At KCP (NSE:KCP) Paint An Interesting Picture

NSEI:KCP
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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at KCP (NSE:KCP) and its ROCE trend, we weren't exactly thrilled.

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

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 KCP:

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

0.11 = ₹1.6b ÷ (₹20b - ₹4.8b) (Based on the trailing twelve months to September 2020).

Thus, KCP has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

View our latest analysis for KCP

roce
NSEI:KCP Return on Capital Employed January 12th 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're interested in investigating KCP's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is KCP's ROCE Trending?

When we looked at the ROCE trend at KCP, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that KCP is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 13% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 2 warning signs for KCP (1 is a bit concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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