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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Kelsian Group (ASX:KLS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. The formula for this calculation on Kelsian Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = AU$121m ÷ (AU$2.5b - AU$377m) (Based on the trailing twelve months to December 2024).
So, Kelsian Group has an ROCE of 5.7%. On its own, that's a low figure but it's around the 7.1% average generated by the Transportation industry.
Check out our latest analysis for Kelsian Group
Above you can see how the current ROCE for Kelsian Group 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 analyst report for Kelsian Group .
How Are Returns Trending?
On the surface, the trend of ROCE at Kelsian Group doesn't inspire confidence. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 5.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Kelsian Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Kelsian Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 15% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know about the risks facing Kelsian Group, we've discovered 2 warning signs that you should be aware of.