Kratos Defense & Security Solutions' (NASDAQ:KTOS) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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.

What Is 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)

0.0053 = US$6.9m ÷ (US$1.6b - US$245m) (Based on the trailing twelve months to March 2023).

So, Kratos Defense & Security Solutions has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 10.0%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for Kratos Defense & Security Solutions.

SWOT Analysis for Kratos Defense & Security Solutions

What The Trend Of ROCE Can Tell Us

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 2.1% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Kratos Defense & Security Solutions' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kratos Defense & Security Solutions. In light of this, the stock has only gained 17% 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 3 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.