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Keg Royalties Income Fund (TSE:KEG.UN) Will Be Looking To Turn Around Its Returns

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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Keg Royalties Income Fund (TSE:KEG.UN), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Keg Royalties Income Fund is:

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

0.094 = CA$24m ÷ (CA$257m - CA$2.0m) (Based on the trailing twelve months to March 2022).

Thus, Keg Royalties Income Fund has an ROCE of 9.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.7%.

Check out our latest analysis for Keg Royalties Income Fund

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Keg Royalties Income Fund's ROCE against it's prior returns. If you'd like to look at how Keg Royalties Income Fund has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Keg Royalties Income Fund's ROCE Trend?

We are a bit worried about the trend of returns on capital at Keg Royalties Income Fund. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Keg Royalties Income Fund becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Keg Royalties Income Fund is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Keg Royalties Income Fund does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

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

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.