Capital Allocation Trends At Kewaunee Scientific (NASDAQ:KEQU) Aren't Ideal
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Kewaunee Scientific (NASDAQ:KEQU), it didn't seem to tick all of these boxes.
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 Kewaunee Scientific is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$9.5m ÷ (US$125m - US$44m) (Based on the trailing twelve months to July 2023).
Thus, Kewaunee Scientific has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 9.4% it's much better.
Check out our latest analysis for Kewaunee Scientific
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kewaunee Scientific's ROCE against it's prior returns. If you're interested in investigating Kewaunee Scientific's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Kewaunee Scientific Tell Us?
When we looked at the ROCE trend at Kewaunee Scientific, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Kewaunee Scientific's ROCE
While returns have fallen for Kewaunee Scientific in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 34% over 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.
One more thing: We've identified 4 warning signs with Kewaunee Scientific (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.
While Kewaunee Scientific may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
