Karat Packaging (NASDAQ:KRT) Is Doing The Right Things To Multiply Its Share Price

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Karat Packaging (NASDAQ:KRT) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Karat Packaging, this is the formula:

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

0.19 = US$45m ÷ (US$280m - US$46m) (Based on the trailing twelve months to September 2023).

Thus, Karat Packaging has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Trade Distributors industry.

View our latest analysis for Karat Packaging

In the above chart we have measured Karat Packaging's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Karat Packaging here for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Karat Packaging. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 676%. So we're very much inspired by what we're seeing at Karat Packaging thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

All in all, it's terrific to see that Karat Packaging is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 80% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Karat Packaging does have some risks though, and we've spotted 1 warning sign for Karat Packaging that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.