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

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Kontoor Brands (NYSE:KTB) looks great, so lets see what the trend can tell us.

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)

0.26 = US$331m ÷ (US$1.6b - US$393m) (Based on the trailing twelve months to December 2023).

Therefore, Kontoor Brands has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Luxury industry average of 12%.

View our latest analysis for Kontoor Brands

Above you can see how the current ROCE for Kontoor Brands 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 Kontoor Brands for free.

What Can We Tell From Kontoor Brands' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Kontoor Brands. The data shows that returns on capital have increased by 38% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Kontoor Brands appears to been achieving more with less, since the business is using 32% less capital to run its operation. 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.

The Bottom Line

In the end, Kontoor Brands has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 36% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Kontoor Brands, we've discovered 2 warning signs that you should be aware of.

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.