Yahoo Finance King River Resources (ASX:KRR) Is Very Good At Capital Allocation
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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in King River Resources' (ASX:KRR) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for King River Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = AU$7.7m ÷ (AU$26m - AU$413k) (Based on the trailing twelve months to June 2023).
Therefore, King River Resources has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.
See our latest analysis for King River Resources
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating King River Resources' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is King River Resources' ROCE Trending?
The fact that King River Resources is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 30% on its capital. And unsurprisingly, like most companies trying to break into the black, King River Resources is utilizing 33% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On King River Resources' ROCE
Long story short, we're delighted to see that King River Resources' reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 85% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
If you want to know some of the risks facing King River Resources we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
