U.S. markets close in 41 minutes
  • S&P 500

    4,050.73
    +93.10 (+2.35%)
     
  • Dow 30

    34,364.57
    +512.04 (+1.51%)
     
  • Nasdaq

    11,365.24
    +381.46 (+3.47%)
     
  • Russell 2000

    1,867.86
    +31.31 (+1.71%)
     
  • Crude Oil

    80.59
    +2.39 (+3.06%)
     
  • Gold

    1,782.60
    +18.90 (+1.07%)
     
  • Silver

    21.94
    +0.74 (+3.47%)
     
  • EUR/USD

    1.0423
    +0.0088 (+0.85%)
     
  • 10-Yr Bond

    3.7030
    -0.0450 (-1.20%)
     
  • GBP/USD

    1.2070
    +0.0120 (+1.01%)
     
  • USD/JPY

    137.8350
    -0.7990 (-0.58%)
     
  • BTC-USD

    17,047.64
    +578.44 (+3.51%)
     
  • CMC Crypto 200

    404.84
    +4.15 (+1.04%)
     
  • FTSE 100

    7,573.05
    +61.05 (+0.81%)
     
  • Nikkei 225

    27,968.99
    -58.85 (-0.21%)
     

Some Investors May Be Worried About Key Tronic's (NASDAQ:KTCC) Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Key Tronic (NASDAQ:KTCC) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Key Tronic:

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

0.032 = US$8.0m ÷ (US$411m - US$164m) (Based on the trailing twelve months to April 2022).

Thus, Key Tronic has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out our latest analysis for Key Tronic

roce
roce

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

What Does the ROCE Trend For Key Tronic Tell Us?

When we looked at the ROCE trend at Key Tronic, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.9% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Key Tronic is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 24% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Key Tronic has the makings of a multi-bagger.

Key Tronic does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Key Tronic 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.