To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in KBR's (NYSE:KBR) returns on capital, so let's have a look.
Understanding 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 KBR, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$473m ÷ (US$6.0b - US$2.1b) (Based on the trailing twelve months to September 2023).
Thus, KBR has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 13%.
View our latest analysis for KBR
In the above chart we have measured KBR's 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 KBR.
What The Trend Of ROCE Can Tell Us
KBR is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 76% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
What We Can Learn From KBR's ROCE
In summary, we're delighted to see that KBR has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 283% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
While KBR looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether KBR is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.