If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at K&S (ASX:KSC) and its trend of ROCE, we really liked what we saw.

What is 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. The formula for this calculation on K&S is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = AU$42m ÷ (AU$537m - AU$122m) (Based on the trailing twelve months to December 2020).

Therefore, K&S has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Logistics industry average it falls behind.

Check out our latest analysis for K&S  roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for K&S' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of K&S, check out these freegraphs here.

How Are Returns Trending?

The trends we've noticed at K&S are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From K&S' ROCE



All in all, it's terrific to see that K&S is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 50% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted  2 warning signs  facing K&S that you might find interesting.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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