Investors Will Want K3 Business Technology Group's (LON:KBT) Growth In ROCE To Persist
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in K3 Business Technology Group's (LON:KBT) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 K3 Business Technology Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£2.8m ÷ (UK£45m - UK£17m) (Based on the trailing twelve months to November 2023).
Thus, K3 Business Technology Group has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.1% generated by the Software industry.
Check out our latest analysis for K3 Business Technology Group
In the above chart we have measured K3 Business Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering K3 Business Technology Group for free.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at K3 Business Technology Group. The figures show that over the last five years, returns on capital have grown by 131%. The company is now earning UK£0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 61% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
What We Can Learn From K3 Business Technology Group's ROCE
In the end, K3 Business Technology Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 52% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing: We've identified 2 warning signs with K3 Business Technology Group (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns 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 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.
