Kitron (OB: KIT) knows how to allocate capital efficiently


Did you know that certain financial measures can provide clues about a possible multi-bagger? A common approach is to try to find a business with Return on capital employed (ROCE) which is increasing, in parallel with a amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. So when we looked at the trend in ROCE from Kitron (OB: KIT) we really liked what we saw.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Kitron is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.28 = kr327m ÷ (kr2.6b – kr1.5b) (Based on the last twelve months up to March 2021).

Therefore, Kitron has 28% ROCE. This is a fantastic return and not only that, it exceeds the 12% average earned by companies in a similar industry.

See our latest review for Kitron

OB: KIT Return on Capital Employed May 30, 2021

In the graph above, we measured Kitron’s past ROCE against its past performance, but the future is arguably more important. If you like, you can check out analyst forecasts covering Kitron here for free.

What can we say about Kitron’s ROCE trend?

The trends that we have noticed at Kitron are quite reassuring. Over the past five years, returns on capital employed have increased dramatically to 28%. The amount of capital employed also increased by 82%. This may indicate that there are many opportunities to invest capital in-house and at ever higher rates, a common combination among multiple baggers.

On the other hand, Kitron’s current liabilities are still quite high at 56% of total assets. This can entail some risk as the company basically operates with quite a lot of dependence on its suppliers or other types of short term creditors. Ideally, we would like this to be reduced, as that would mean less risky bonds.

In conclusion…

A business that increases its return on capital and can constantly reinvest in itself is a highly desirable trait, and that’s what Kitron offers. And a remarkable 499% total return over the past five years tells us that investors expect more good things to happen in the future. Therefore, we believe it would be worth checking out if these trends will continue.

Kitron does have some risks, though, and we’ve spotted 2 warning signs for Kitron that might interest you.

If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.
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