Stock Analysis

Under The Bonnet, Kumba Iron Ore's (JSE:KIO) Returns Look Impressive

JSE:KIO
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Kumba Iron Ore (JSE:KIO) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

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 Kumba Iron Ore is:

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

0.38 = R29b ÷ (R87b - R12b) (Based on the trailing twelve months to June 2023).

Thus, Kumba Iron Ore has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 17%.

View our latest analysis for Kumba Iron Ore

roce
JSE:KIO Return on Capital Employed November 16th 2023

In the above chart we have measured Kumba Iron Ore'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 Kumba Iron Ore here for free.

What Can We Tell From Kumba Iron Ore's ROCE Trend?

The trends we've noticed at Kumba Iron Ore are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 38%. The amount of capital employed has increased too, by 38%. So we're very much inspired by what we're seeing at Kumba Iron Ore thanks to its ability to profitably reinvest capital.

What We Can Learn From Kumba Iron Ore's ROCE

To sum it up, Kumba Iron Ore has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Kumba Iron Ore, we've discovered 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Kumba Iron Ore is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

About JSE:KIO

Kumba Iron Ore

Engages in the exploration, extraction, beneficiation, marketing, sale, and shipping of iron ore for the steel industry primarily in South Africa, China, rest of Asia, Europe, the Middle East, and North Africa.

Outstanding track record with excellent balance sheet and pays a dividend.