If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, the ROCE of Kainos Group (LON:KNOS) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kainos Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.36 = UK£59m ÷ (UK£279m – UK£113m) (Based on the trailing twelve months to March 2024).
Thus, Kainos Group has an ROCE of 36%. In absolute terms that’s a great return and it’s even better than the IT industry average of 17%.
Check out our latest analysis for Kainos Group
roce
In the above chart we have measured Kainos Group’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 Kainos Group for free.
What Can We Tell From Kainos Group’s ROCE Trend?
It’s hard not to be impressed by Kainos Group’s returns on capital. The company has consistently earned 36% for the last five years, and the capital employed within the business has risen 234% in that time. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. You’ll see this when looking at well operated businesses or favorable business models.
On a side note, Kainos Group’s current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Kainos Group’s ROCE
In the end, the company has proven it can reinvest it’s capital at high rates of returns, which you’ll remember is a trait of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
Like most companies, Kainos Group does come with some risks, and we’ve found 1 warning sign that you should be aware of.
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.
Content retrieved from: https://finance.yahoo.com/news/kainos-group-lon-knos-reinvesting-050107862.html.
