To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Kratos Defense & Security Solutions (NASDAQ:KTOS) looks quite promising in regards to its trends of return on capital.

Understanding 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 Kratos Defense & Security Solutions, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.018 = US$25m ÷ (US$1.6b - US$228m) (Based on the trailing twelve months to June 2022).

Therefore, Kratos Defense & Security Solutions has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 8.8%.

See our latest analysis for Kratos Defense & Security Solutions

In the above chart we have measured Kratos Defense & Security Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kratos Defense & Security Solutions.

So How Is Kratos Defense & Security Solutions' ROCE Trending?

Kratos Defense & Security Solutions has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.8% which is a sight for sore eyes. Not only that, but the company is utilizing 77% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Kratos Defense & Security Solutions' ROCE

In summary, it's great to see that Kratos Defense & Security Solutions has managed to break into profitability and is continuing to reinvest in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 0.8% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

While Kratos Defense & Security Solutions looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether KTOS is currently trading for a fair price.

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.