In This Article:
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at K3 Business Technology Group (LON:KBT) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for K3 Business Technology Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = UK£3.5m ÷ (UK£39m - UK£14m) (Based on the trailing twelve months to May 2024).
So, K3 Business Technology Group has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 11% it's much better.
View our latest analysis for K3 Business Technology Group
In the above chart we have measured K3 Business Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for K3 Business Technology Group .
The Trend Of ROCE
K3 Business Technology Group has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 286%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 64% less than it was five years ago, which can be indicative of a business that's improving its efficiency. K3 Business Technology Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
In the end, K3 Business Technology Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 67% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.