Knowles' (NYSE:KN) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Knowles (NYSE:KN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Knowles is:

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

0.063 = US$62m ÷ (US$1.2b - US$186m) (Based on the trailing twelve months to September 2024).

Therefore, Knowles has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

View our latest analysis for Knowles

In the above chart we have measured Knowles' 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 Knowles for free.

What Can We Tell From Knowles' ROCE Trend?

Over the past five years, Knowles' ROCE has remained relatively flat while the business is using 33% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 6.3%, it's hard to get excited about these developments.

The Key Takeaway

It's a shame to see that Knowles is effectively shrinking in terms of its capital base. And with the stock having returned a mere 2.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Knowles could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for KN on our platform quite valuable.

While Knowles 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.