If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Kimberly-Clark (NYSE:KMB), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Kimberly-Clark:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$3.0b ÷ (US$17b - US$6.8b) (Based on the trailing twelve months to September 2023).
Thus, Kimberly-Clark has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
View our latest analysis for Kimberly-Clark
Above you can see how the current ROCE for Kimberly-Clark 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 Kimberly-Clark.
So How Is Kimberly-Clark's ROCE Trending?
In terms of Kimberly-Clark's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 42% where it was five years ago. However it looks like Kimberly-Clark might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Kimberly-Clark's ROCE
In summary, Kimberly-Clark is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 24% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Kimberly-Clark does have some risks though, and we've spotted 3 warning signs for Kimberly-Clark that you might be interested in.
Kimberly-Clark is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.