Returns On Capital Are Showing Encouraging Signs At Kronos Worldwide (NYSE:KRO)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Kronos Worldwide's (NYSE:KRO) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Kronos Worldwide:

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

0.062 = US$109m ÷ (US$2.0b - US$202m) (Based on the trailing twelve months to June 2021).

Thus, Kronos Worldwide has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.8%.

Check out our latest analysis for Kronos Worldwide

Above you can see how the current ROCE for Kronos Worldwide 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 Kronos Worldwide here for free.

How Are Returns Trending?

We're delighted to see that Kronos Worldwide is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.2% which is a sight for sore eyes. Not only that, but the company is utilizing 73% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Kronos Worldwide's ROCE

Long story short, we're delighted to see that Kronos Worldwide's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 117% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Kronos Worldwide does come with some risks, and we've found 2 warning signs that you should be aware of.

While Kronos Worldwide may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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