The Returns At Kongsberg Automotive (OB:KOA) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Kongsberg Automotive (OB:KOA) and its ROCE trend, we weren't exactly thrilled.

Understanding 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)

0.0099 = €6.4m ÷ (€898m - €253m) (Based on the trailing twelve months to December 2020).

Thus, Kongsberg Automotive has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.2%.

See 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're interested in investigating Kongsberg Automotive's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Kongsberg Automotive's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago, while the business's capital employed increased by 25%. Usually this isn't ideal, but given Kongsberg Automotive conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Kongsberg Automotive probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

In summary, we're somewhat concerned by Kongsberg Automotive's diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 95% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Kongsberg Automotive (2 can't be ignored) you should be aware of.

While Kongsberg Automotive 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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