If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Kongsberg Gruppen (OB:KOG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kongsberg Gruppen:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = kr2.1b ÷ (kr39b - kr18b) (Based on the trailing twelve months to September 2020).
Thus, Kongsberg Gruppen has an ROCE of 9.6%. Even though it's in line with the industry average of 10%, it's still a low return by itself.
Above you can see how the current ROCE for Kongsberg Gruppen compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kongsberg Gruppen.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Kongsberg Gruppen doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.On a side note, Kongsberg Gruppen's current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Kongsberg Gruppen's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Kongsberg Gruppen is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 88% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
Kongsberg Gruppen could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
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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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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