Kratos Defense & Security Solutions (NASDAQ:KTOS) Is Looking To Continue Growing Its Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Kratos Defense & Security Solutions (NASDAQ:KTOS) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 Kratos Defense & Security Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = US$31m ÷ (US$1.6b - US$202m) (Based on the trailing twelve months to June 2021).
So, Kratos Defense & Security Solutions has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 8.9%.
View our latest analysis for Kratos Defense & Security Solutions
In the above chart we have measured Kratos Defense & Security Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kratos Defense & Security Solutions.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 2.3%. 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 93%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
All in all, it's terrific to see that Kratos Defense & Security Solutions is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 230% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Kratos Defense & Security Solutions does come with some risks, and we've found 1 warning sign that you should be aware of.
While Kratos Defense & Security Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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