What are the early trends to look for to identify a stock that could multiply in value over the long term? A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. So when we ran our eyes Kingspan Group (ISE:KRX) ROCE trend, we liked what we saw.
Understanding return on capital employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Kingspan Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = €735m ÷ (€6.4bn – €1.7bn) (Based on the last twelve months to December 2021).
Thereby, Kingspan Group has a ROCE of 16%. In absolute terms, this is a fairly normal return, and somewhat close to the building industry average of 15%.
Discover our latest analysis for Kingspan Group
Above you can see how Kingspan Group’s current ROCE compares to its past returns on capital, but there is little you can say about the past. If you wish, you can view forecasts from analysts covering the Kingspan Group here for free.
What is the return trend?
The ROCE trend isn’t showing much, but overall returns are decent. The company has employed 111% more capital over the past five years, and the return on that capital has remained stable at 16%. Since 16% is a moderate ROCE, it’s good to see that a company can continue to reinvest at these decent rates of return. Stable returns in this stage can be unexciting, but if they can be sustained over the long term, they often offer handsome rewards to shareholders.
Our view on Kingspan Group ROCE
Ultimately, Kingspan Group has proven its ability to adequately reinvest capital at good rates of return. And long-term investors would be delighted with the 158% return they’ve received over the past five years. So while the positive underlying trends can be explained by investors, we still think this stock deserves further investigation.
Kingspan Group might be trading at an attractive price in other respects, so you might find our free estimate of intrinsic value on our utterly valuable platform.
Although Kingspan Group is not currently achieving the highest returns, we have compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.