Kratos Defense & Security Solutions (NASDAQ:KTOS) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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.

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. To calculate this metric for Kratos Defense & Security Solutions, this is the formula:

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

0.023 = US$38m ÷ (US$1.9b - US$288m) (Based on the trailing twelve months to March 2024).

So, Kratos Defense & Security Solutions has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 10%.

View 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, you can check out the forecasts from the analysts covering Kratos Defense & Security Solutions for free.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 3.7% five years ago, while the business's capital employed increased by 67%. Usually this isn't ideal, but given Kratos Defense & Security Solutions conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Kratos Defense & Security Solutions probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Kratos Defense & Security Solutions' ROCE

While returns have fallen for Kratos Defense & Security Solutions in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 4.9% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a separate note, we've found 2 warning signs for Kratos Defense & Security Solutions you'll probably want to know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com