K&O Energy Group (TSE:1663) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at K&O Energy Group (TSE:1663) so let's look a bit deeper.

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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. Analysts use this formula to calculate it for K&O Energy Group:

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

0.083 = JP¥8.8b ÷ (JP¥119b - JP¥14b) (Based on the trailing twelve months to December 2024).

So, K&O Energy Group has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Gas Utilities industry average of 4.9%.

See our latest analysis for K&O Energy Group

Above you can see how the current ROCE for K&O Energy Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for K&O Energy Group .

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. So we're very much inspired by what we're seeing at K&O Energy Group thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, K&O Energy Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, K&O Energy Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While K&O Energy Group 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.

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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.