Kratos Defense & Security Solutions (NASDAQ:KTOS) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Kratos Defense & Security Solutions (NASDAQ:KTOS), we don't think it's current trends fit the mold of a multi-bagger.

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 Kratos Defense & Security Solutions:

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

0.0072 = US$9.5m ÷ (US$1.6b - US$251m) (Based on the trailing twelve months to June 2023).

So, Kratos Defense & Security Solutions has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 9.5%.

Check out our latest analysis for Kratos Defense & Security Solutions

In the above chart we have measured Kratos Defense & Security Solutions' 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 Kratos Defense & Security Solutions here for free.

So How Is Kratos Defense & Security Solutions' ROCE Trending?

When we looked at the ROCE trend at Kratos Defense & Security Solutions, we didn't gain much confidence. To be more specific, ROCE has fallen from 2.7% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Kratos Defense & Security Solutions' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kratos Defense & Security Solutions is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 1 warning sign for Kratos Defense & Security Solutions you'll probably want to know about.

While Kratos Defense & Security Solutions 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.