What Can The Trends At Koninklijke KPN (AMS:KPN) Tell Us About Their Returns?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Koninklijke KPN (AMS:KPN) so let's look a bit deeper.

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. To calculate this metric for Koninklijke KPN, this is the formula:

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

0.10 = €959m ÷ (€12b - €2.4b) (Based on the trailing twelve months to June 2020).

Therefore, Koninklijke KPN has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 8.0% generated by the Telecom industry, it's much better.

Check out our latest analysis for Koninklijke KPN

In the above chart we have measured Koninklijke KPN's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Koninklijke KPN's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Koninklijke KPN. The figures show that over the last five years, returns on capital have grown by 81%. The company is now earning €0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 33% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take On Koninklijke KPN's ROCE

In summary, it's great to see that Koninklijke KPN has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Koninklijke KPN does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While Koninklijke KPN 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. 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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