Karat Packaging (NASDAQ:KRT) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Karat Packaging (NASDAQ:KRT) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Karat Packaging:

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

0.15 = US$38m ÷ (US$311m - US$56m) (Based on the trailing twelve months to June 2024).

So, Karat Packaging has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 13%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Karat Packaging .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Karat Packaging. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 155%. So we're very much inspired by what we're seeing at Karat Packaging thanks to its ability to profitably reinvest capital.

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. Considering the stock has delivered 10% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Karat Packaging and understanding it should be part of your investment process.

While Karat Packaging 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.