Our Take On The Returns On Capital At KABE Group AB (publ.) (STO:KABE B)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating KABE Group AB (publ.) (STO:KABE B), we don't think it's current trends fit the mold of a multi-bagger.

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 KABE Group AB (publ.), this is the formula:

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

0.058 = kr71m ÷ (kr1.7b - kr457m) (Based on the trailing twelve months to September 2020).

So, KABE Group AB (publ.) has an ROCE of 5.8%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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. To be more specific, ROCE has fallen from 13% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From KABE Group AB (publ.)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for KABE Group AB (publ.) have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 53% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing KABE Group AB (publ.) we've found 2 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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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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