If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Knife River (NYSE:KNF) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Knife River, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$303m ÷ (US$2.5b - US$297m) (Based on the trailing twelve months to March 2024).
Thus, Knife River has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Basic Materials industry average of 11%.
Above you can see how the current ROCE for Knife River compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Knife River .
The Trend Of ROCE
Investors would be pleased with what's happening at Knife River. The data shows that returns on capital have increased substantially over the last two years to 14%. 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 22%. So we're very much inspired by what we're seeing at Knife River thanks to its ability to profitably reinvest capital.
What We Can Learn From Knife River's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Knife River has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 51% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Knife River, you might be interested to know about the 1 warning sign that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.