Kenmare Resources (LON:KMR) Could Become A Multi-Bagger
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Kenmare Resources (LON:KMR) looks great, so lets see what the trend can tell us.
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. The formula for this calculation on Kenmare Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$239m ÷ (US$1.2b - US$67m) (Based on the trailing twelve months to June 2023).
Therefore, Kenmare Resources has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.2%.
Check out our latest analysis for Kenmare Resources
Above you can see how the current ROCE for Kenmare Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Kenmare Resources' ROCE Trending?
We like the trends that we're seeing from Kenmare Resources. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 29%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
All in all, it's terrific to see that Kenmare Resources is reaping the rewards from prior investments and is growing its capital base. And a remarkable 126% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Kenmare Resources can keep these trends up, it could have a bright future ahead.
Kenmare Resources does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
