Here's What's Concerning About Kjell Group's (STO:KJELL) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Kjell Group (STO:KJELL), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kjell Group:

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

0.051 = kr90m ÷ (kr2.4b - kr598m) (Based on the trailing twelve months to June 2023).

So, Kjell Group has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 8.9%.

Check out our latest analysis for Kjell Group

Above you can see how the current ROCE for Kjell Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kjell Group.

The Trend Of ROCE

In terms of Kjell Group's historical ROCE movements, the trend doesn't inspire confidence. About four years ago, returns on capital were 8.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kjell Group becoming one if things continue as they have.

Our Take On Kjell Group's ROCE

In summary, it's unfortunate that Kjell Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 37% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Kjell Group (2 make us uncomfortable) you should be aware of.

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. 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. Simply Wall St has no position in any stocks mentioned.