Should You Be Excited About Kindred Group's (STO:KIND SDB) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. And in light of that, the trends we're seeing at Kindred Group's (STO:KIND SDB) look very promising so lets take a look.

What is 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 Kindred Group, this is the formula:

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

0.39 = UK£230m ÷ (UK£992m - UK£406m) (Based on the trailing twelve months to December 2020).

Therefore, Kindred Group has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 14%.

Check out our latest analysis for Kindred Group

Above you can see how the current ROCE for Kindred Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We like the trends that we're seeing from Kindred Group. Over the last five years, returns on capital employed have risen substantially to 39%. Basically the business is earning more per dollar of capital invested and in addition to that, 170% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Kindred Group's current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Kindred Group's ROCE

All in all, it's terrific to see that Kindred Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 63% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Kindred Group can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Kindred Group, we've discovered 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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