KBJ SA (WSE:KBJ): Assessing Capital Returns

This article is intended for those of you who are at the beginning of your investing journey and looking to gauge the potential return on investment in KBJ SA (WSE:KBJ).

KBJ stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to KBJ’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently KBJ is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

See our latest analysis for KBJ

Calculating Return On Capital Employed for KBJ

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business' ability to grow your capital at a level that grants an investment over other companies. We'll look at KBJ’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:

As you can see, KBJ earned PLN10.7 from every PLN100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which KBJ has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.

A deeper look

KBJ doesn't return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that KBJ's ROCE has deteriorated from 13%, indicating the company's capital returns have declined. We can see that earnings have actually increased from zł491k to zł696k but capital employed rose by a relatively larger volume as a result of a rise in total assets , which means that although earnings have increased, KBJ requires more capital to produce each PLN1 of earnings.

Next Steps

KBJ's investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate KBJ or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for KBJ’s future growth? Take a look at our free research report of analyst consensus for KBJ’s outlook.
2. Valuation: What is KBJ worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether KBJ is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.