There are a few key trends to look for if we are to identify the next multi-bagger. First, we will want to see a to recover on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. With this in mind, the ROCE of KONE Oyj (HEL: KNEBV) looks attractive right now, so let’s see what the yield trend can tell us.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on KONE Oyj is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.39 = € 1.4bn ÷ (€ 8.6bn – € 5.1bn) (Based on the last twelve months up to June 2021).
So, KONE Oyj has a ROCE of 39%. This is a fantastic return and not only that, it exceeds the 11% average earned by companies in a similar industry.
Check out our latest review for KONE Oyj
Above you can see how KONE Oyj’s current ROCE compares to its previous returns on capital, but there’s not much you can say about the past. If you like, you can view analyst forecasts covering KONE Oyj here for free.
The ROCE trend
KONE Oyj is to be congratulated on their feedback. The company has steadily gained 39% over the past five years and the capital employed within the company has increased by 26% during this period. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. If these trends can continue, it wouldn’t surprise us if the company were to become a multi-bagger.
On a separate but related note, it’s important to know that KONE Oyj has a current liability to total assets ratio of 60%, which we consider to be quite high. What this actually means is that suppliers (or short-term creditors) fund a large part of the business, so just be aware that this can introduce some elements of risk. Ideally, we would like this to decrease as that would mean less risky bonds.
KONE Oyj ROCE Basics
KONE Oyj has demonstrated its competence in generating high returns on increasing amounts of capital employed, which we are delighted with. And the stock followed suit, returning 65% to shareholders over the past five years. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
Like most businesses, KONE Oyj comes with certain risks, and we have found 1 warning sign that you need to be aware of.
If you want to look for other stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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