Why We Like The Returns At Kumba Iron Ore (JSE:KIO)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

What Is 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 Kumba Iron Ore:

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%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

See our latest analysis for Kumba Iron Ore

Above you can see how the current ROCE for Kumba Iron Ore compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

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%. Basically the business is earning more per dollar of capital invested and in addition to that, 38% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Kumba Iron Ore's ROCE

All in all, it's terrific to see that Kumba Iron Ore is reaping the rewards from prior investments and is growing its capital base. And a remarkable 158% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Kumba Iron Ore does have some risks though, and we've spotted 1 warning sign for Kumba Iron Ore that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.