Investors Could Be Concerned With KMD Brands' (NZSE:KMD) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think KMD Brands (NZSE:KMD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 KMD Brands, this is the formula:

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

0.034 = NZ$43m ÷ (NZ$1.5b - NZ$248m) (Based on the trailing twelve months to January 2024).

Thus, KMD Brands has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 17%.

See our latest analysis for KMD Brands

In the above chart we have measured KMD Brands' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering KMD Brands for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at KMD Brands doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.4% from 14% five years ago. However it looks like KMD Brands might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From KMD Brands' ROCE

To conclude, we've found that KMD Brands is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 68% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing KMD Brands that you might find interesting.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com