If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kumba Iron Ore’s (JSE:KIO) returns on capital, so let’s have a look.
What Is Return On Capital Employed (ROCE)?
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 Kumba Iron Ore, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.38 = R29b ÷ (R87b – R12b) (Based on the trailing twelve months to June 2023).
So, Kumba Iron Ore has an ROCE of 38%. In absolute terms that’s a great return and it’s even better than the Metals and Mining industry average of 16%.
See our latest analysis for Kumba Iron Ore
Above you can see how the current ROCE for Kumba Iron Ore 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 report for Kumba Iron Ore.
What Does the ROCE Trend For Kumba Iron Ore Tell Us?
We like the trends that we’re seeing from Kumba Iron Ore. The data shows that returns on capital have increased substantially over the last five years to 38%. The amount of capital employed has increased too, by 38%. So we’re very much inspired by what we’re seeing at Kumba Iron Ore thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it’s great to see that Kumba Iron Ore can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
Like most companies, Kumba Iron Ore does come with some risks, and we’ve found 1 warning sign that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
