What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. That's why when we briefly looked at Kernel Holding's (WSE:KER) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Kernel Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$832m ÷ (US$4.4b - US$890m) (Based on the trailing twelve months to September 2021).
Thus, Kernel Holding has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.
In the above chart we have measured Kernel Holding's 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 Kernel Holding here for free.
How Are Returns Trending?
We'd be pretty happy with returns on capital like Kernel Holding. The company has employed 200% more capital in the last five years, and the returns on that capital have remained stable at 24%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Kernel Holding can keep this up, we'd be very optimistic about its future.
The Key Takeaway
In short, we'd argue Kernel Holding has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last five years the stock has declined 64%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
One final note, you should learn about the 3 warning signs we've spotted with Kernel Holding (including 1 which is a bit concerning) .
Kernel Holding is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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.