If you're looking at a mature business that's past the growth stage, what underlying trends emerge? Typically, you'll see both trends. return As capital employed (ROCE) decreases, this typically coincides with a decrease in equity. amount of capital employed. This combination shows that not only are companies investing less, but their returns on their investments are also decreasing. When I looked into it, I found that cup (JSE:KAP), the above trends don't seem to be very good.
About Return on Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's annual pre-tax profit (return) on the capital employed in the business. The formula for this calculation in KAP is:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.067 = R1.4b ÷ (R30b – R8.8b) (Based on the previous 12 months to December 2023).
therefore, KAP's ROCE is 6.7%. In absolute terms, this is a poor return, below the industrial average of 8.8%.
Check out our latest analysis for KAP.
Above we show how KAP's current ROCE compares to its previous return on equity, but the past can only tell us so much. If you wish, check out what the analysts covering KAP are forecasting. free.
What can we learn from KAP's ROCE trend?
Given the downward trend in returns, there are reasons to be cautious about KAP. Unfortunately, his return on equity has declined from 11% five years ago. And in terms of capital employed, businesses are leveraging about the same amount of capital as they were back then. This combination may indicate a mature business that still has areas to invest capital, but the returns it receives will not be as high due to new competition and the possibility of lower profit margins. Therefore, he won't hold his breath for KAP to become a multibagger if things continue as they are, as these trends are usually not conducive to the creation of multibaggers.
Our take on KAP's ROCE
All in all, a lower return using the same amount of capital is not exactly a sign of compound interest. Investors aren't happy about the move, as the stock is down 58% from five years ago. There are fundamental trends in these areas that aren't great, so consider looking elsewhere.
One last thing to note. 3 warning signs We've found things in KAP (including one that's a little concerning).
For those who like investing, solid company, check this out free List of companies with strong balance sheets and high return on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
