The Returns On Capital At KABE Group AB (publ.) (STO:KABE B) Don't Inspire Confidence

By
Simply Wall St
Published
November 19, 2021
OM:KABE B
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

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. Analysts use this formula to calculate it for KABE Group AB (publ.):

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

0.15 = kr218m ÷ (kr2.1b - kr663m) (Based on the trailing twelve months to September 2021).

Thus, KABE Group AB (publ.) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Auto industry.

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

roce
OM:KABE B Return on Capital Employed November 20th 2021

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 want to delve into the historical earnings, revenue and cash flow of KABE Group AB (publ.), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of KABE Group AB (publ.)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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

In summary, despite lower returns in the short term, we're encouraged to see that KABE Group AB (publ.) is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 57% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 2 warning signs we've spotted with KABE Group AB (publ.) (including 1 which doesn't sit too well with us) .

While KABE Group AB (publ.) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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