Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. With this in mind, the ROCE of Kardex Holding (VTX:KARN) looks attractive right now, so let’s see what the yield trend can tell us.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Kardex Holding, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.28 = €60m ÷ (€338m – €119m) (Based on the last twelve months to December 2021).
Thereby, Kardex Holding posted a ROCE of 28%. This is a fantastic return and not only that, it exceeds the 13% average earned by companies in a similar industry.
Check out our latest analysis for Kardex Holding
In the chart above, we measured Kardex Holding’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering Kardex Holding here for free.
What can we say about the ROCE trend of Kardex Holding?
We would rather be satisfied with returns on capital like Kardex Holding. The company has consistently gained 28% over the past five years and the capital employed within the company has increased by 40% over this period. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If Kardex Holding can continue like this, we would be very optimistic about its future.
In short, we would say that Kardex Holding has the makings of a multi-bagger since it has been able to compound its capital at very profitable rates of return. And since the stock has risen sharply over the past five years, it looks like the market might be expecting that trend to continue. So while the positive underlying trends can be explained by investors, we still think this stock deserves further investigation.
One last note, you should inquire about the 2 warning signs we spotted some with Kardex Holding (including 1 that is potentially serious).
If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.