Be Wary Of Kongsberg Automotive (OB:KOA) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Kongsberg Automotive (OB:KOA) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

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 Kongsberg Automotive:

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

0.028 = €15m ÷ (€768m - €234m) (Based on the trailing twelve months to June 2023).

Therefore, Kongsberg Automotive has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 9.5%.

View our latest analysis for Kongsberg Automotive

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kongsberg Automotive, check out these free graphs here.

How Are Returns Trending?

In terms of Kongsberg Automotive's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.7% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Kongsberg Automotive to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Kongsberg Automotive is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 88% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you're still interested in Kongsberg Automotive it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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. 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.