We Like These Underlying Return On Capital Trends At Knowles (NYSE:KN)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Knowles (NYSE:KN) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Knowles is:

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

0.088 = US$96m ÷ (US$1.2b - US$99m) (Based on the trailing twelve months to December 2022).

Thus, Knowles has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 13%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Knowles.

How Are Returns Trending?

Knowles has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 56% over the trailing five years. The company is now earning US$0.09 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Our Take On Knowles' ROCE

In a nutshell, we're pleased to see that Knowles has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 24% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

While Knowles looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether KN is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.