Yahoo Finance Returns At Kaiser Reef (ASX:KAU) Are On The Way Up
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Kaiser Reef (ASX:KAU) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Kaiser Reef:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = AU$1.9m ÷ (AU$31m - AU$5.0m) (Based on the trailing twelve months to December 2022).
Thus, Kaiser Reef has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.
Check out our latest analysis for Kaiser Reef
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 Kaiser Reef's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Kaiser Reef's ROCE Trend?
The fact that Kaiser Reef 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 two years ago but is is now generating 7.3% on its capital. Not only that, but the company is utilizing 425% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 16% of the business, which is more than it was two years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line
In summary, it's great to see that Kaiser Reef has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 43% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Kaiser Reef we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
While Kaiser Reef may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
