Will Kratos Defense & Security Solutions' (NASDAQ:KTOS) Growth In ROCE Persist?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in Kratos Defense & Security Solutions' (NASDAQ:KTOS) returns on capital, so let's have a look.

Understanding 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)

0.026 = US$33m ÷ (US$1.5b - US$200m) (Based on the trailing twelve months to September 2020).

So, Kratos Defense & Security Solutions has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 9.8%.

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.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 2.6%. 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 73%. So we're very much inspired by what we're seeing at Kratos Defense & Security Solutions thanks to its ability to profitably reinvest capital.

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

All in all, it's terrific to see that Kratos Defense & Security Solutions is reaping the rewards from prior investments and is growing its capital base. And a remarkable 839% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 5 warning signs for Kratos Defense & Security Solutions that we think you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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