Investors Should Be Encouraged By Kontoor Brands' (NYSE:KTB) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Kontoor Brands' (NYSE:KTB) returns on capital, so let's have a look.

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. The formula for this calculation on Kontoor Brands is:

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

0.32 = US$370m ÷ (US$1.6b - US$440m) (Based on the trailing twelve months to December 2022).

Therefore, Kontoor Brands has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Luxury industry average of 16%.

See our latest analysis for Kontoor Brands

In the above chart we have measured Kontoor Brands' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Kontoor Brands. We found that the returns on capital employed over the last five years have risen by 32%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Kontoor Brands may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

What We Can Learn From Kontoor Brands' ROCE

In a nutshell, we're pleased to see that Kontoor Brands has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Kontoor Brands we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

Kontoor Brands is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.