The Returns At Keppel (SGX:BN4) Aren't Growing
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Keppel (SGX:BN4), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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 Keppel is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = S$654m ÷ (S$28b - S$6.4b) (Based on the trailing twelve months to June 2023).
Therefore, Keppel has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Industrials industry average of 5.9%.
Check out our latest analysis for Keppel
Above you can see how the current ROCE for Keppel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Keppel here for free.
So How Is Keppel's ROCE Trending?
Things have been pretty stable at Keppel, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Keppel doesn't end up being a multi-bagger in a few years time. This probably explains why Keppel is paying out 57% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
In Conclusion...
We can conclude that in regards to Keppel's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Keppel (of which 1 is a bit concerning!) that you should know about.
While Keppel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
