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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at Kratos Defense & Security Solutions (NASDAQ:KTOS), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Kratos Defense & Security Solutions is:

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

0.019 = US$33m ÷ (US$2.0b - US$305m) (Based on the trailing twelve months to March 2025).

So, Kratos Defense & Security Solutions has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 11%.

See our latest analysis for Kratos Defense & Security Solutions

Above you can see how the current ROCE for Kratos Defense & Security Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kratos Defense & Security Solutions .

What Does the ROCE Trend For Kratos Defense & Security Solutions Tell Us?

On the surface, the trend of ROCE at Kratos Defense & Security Solutions doesn't inspire confidence. To be more specific, ROCE has fallen from 3.7% over the last five years. However it looks like Kratos Defense & Security Solutions might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Kratos Defense & Security Solutions' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 179% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Kratos Defense & Security Solutions that we think you should be aware of.

While Kratos Defense & Security Solutions may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.