Investors Could Be Concerned With KABE Group AB (publ.)'s (STO:KABE B) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at KABE Group AB (publ.) (STO:KABE B) and its ROCE trend, we weren't exactly thrilled.

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 KABE Group AB (publ.) is:

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

0.078 = kr96m ÷ (kr1.6b - kr411m) (Based on the trailing twelve months to December 2020).

So, KABE Group AB (publ.) has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Auto industry average of 6.3%.

See our latest analysis for KABE Group AB (publ.)

Historical performance is a great place to start when researching a stock so above you can see the gauge for KABE Group AB (publ.)'s ROCE against it's prior returns. If you'd like to look at how KABE Group AB (publ.) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From KABE Group AB (publ.)'s ROCE Trend?

When we looked at the ROCE trend at KABE Group AB (publ.), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.8% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On KABE Group AB (publ.)'s ROCE

To conclude, we've found that KABE Group AB (publ.) is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 82% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing KABE Group AB (publ.) we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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