Stock Analysis

Here's What's Concerning About Kornit Digital's (NASDAQ:KRNT) Returns On Capital

NasdaqGS:KRNT
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Kornit Digital (NASDAQ:KRNT), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Kornit Digital, this is the formula:

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

0.0037 = US$3.5m ÷ (US$1.0b - US$77m) (Based on the trailing twelve months to March 2022).

Therefore, Kornit Digital has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.9%.

View our latest analysis for Kornit Digital

roce
NasdaqGS:KRNT Return on Capital Employed June 24th 2022

In the above chart we have measured Kornit Digital's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Kornit Digital's ROCE Trend?

In terms of Kornit Digital's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 2.2%, but since then they've fallen to 0.4%. 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kornit Digital. And the stock has followed suit returning a meaningful 84% to shareholders over the last five years. 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.

If you want to continue researching Kornit Digital, you might be interested to know about the 4 warning signs that our analysis has discovered.

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

Valuation is complex, but we're here to simplify it.

Discover if Kornit Digital might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.

About NasdaqGS:KRNT

Kornit Digital

Develops, designs, and markets digital printing solutions for the fashion, apparel, and home decor segments of printed textile industry in the United States, Europe, the Middle East, Africa, the Asia Pacific, and internationally.

Flawless balance sheet very low.