Slowing Rates Of Return At Kellogg (NYSE:K) Leave Little Room For Excitement

By
Simply Wall St
Published
April 17, 2022
NYSE:K
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So, when we ran our eye over Kellogg's (NYSE:K) trend of ROCE, we liked what we saw.

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 Kellogg, this is the formula:

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

0.16 = US$2.0b ÷ (US$18b - US$5.3b) (Based on the trailing twelve months to January 2022).

Therefore, Kellogg has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.4% it's much better.

Check out our latest analysis for Kellogg

roce
NYSE:K Return on Capital Employed April 17th 2022

In the above chart we have measured Kellogg's 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 Kellogg here for free.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 16%. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Kellogg's ROCE

In the end, Kellogg has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 12% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you want to continue researching Kellogg, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Kellogg 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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