Kjell Group (STO:KJELL) Has Some Difficulty Using Its Capital Effectively

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Kjell Group (STO:KJELL), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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)

0.063 = kr112m ÷ (kr2.4b - kr621m) (Based on the trailing twelve months to March 2023).

Therefore, Kjell Group has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Specialty Retail industry average of 6.5%.

View our latest analysis for Kjell Group

In the above chart we have measured Kjell Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kjell Group.

SWOT Analysis for Kjell Group

What Can We Tell From Kjell Group's ROCE Trend?

We are a bit worried about the trend of returns on capital at Kjell Group. Unfortunately the returns on capital have diminished from the 8.0% that they were earning four years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last four years. 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 46% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Kjell Group that we think you should be aware of.

While Kjell Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.