Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Kratos Defense & Security Solutions (NASDAQ:KTOS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Kratos Defense & Security Solutions:

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

0.023 = US$38m ÷ (US$1.9b - US$288m) (Based on the trailing twelve months to March 2024).

Therefore, Kratos Defense & Security Solutions has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 9.8%.

Above you can see how the current ROCE for Kratos Defense & Security Solutions 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 analyst report for Kratos Defense & Security Solutions .

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 3.7% five years ago, while the business's capital employed increased by 67%. Usually this isn't ideal, but given Kratos Defense & Security Solutions conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Kratos Defense & Security Solutions' earnings and if they change as a result from the capital raise.

Our Take On Kratos Defense & Security Solutions' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kratos Defense & Security Solutions. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 1 warning sign for Kratos Defense & Security Solutions that we think you should be aware of.

While Kratos Defense & Security Solutions 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.

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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.