The Returns On Capital At Kodiak Gas Services (NYSE:KGS) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Kodiak Gas Services (NYSE:KGS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kodiak Gas Services is:

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

0.085 = US$348m ÷ (US$4.4b - US$319m) (Based on the trailing twelve months to December 2024).

Therefore, Kodiak Gas Services has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Energy Services industry average of 9.9%.

Check out our latest analysis for Kodiak Gas Services

Above you can see how the current ROCE for Kodiak Gas Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kodiak Gas Services .

So How Is Kodiak Gas Services' ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 13% four years ago, while the business's capital employed increased by 215%. That being said, Kodiak Gas Services raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Kodiak Gas Services' earnings and if they change as a result from the capital raise.

On a side note, Kodiak Gas Services has done well to pay down its current liabilities to 7.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kodiak Gas Services. And the stock has followed suit returning a meaningful 27% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Kodiak Gas Services we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Kodiak Gas Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.