Returns On Capital At KAL Group (JSE:KAL) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That’s why when we briefly looked at KAL Group’s (JSE:KAL) ROCE trend, we were pretty happy with what we saw.

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. To calculate this metric for KAL Group, this is the formula:

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

0.14 = R667m ÷ (R8.2b – R3.5b) (Based on the trailing twelve months to September 2024).

So, KAL Group has an ROCE of 14%. In isolation, that’s a pretty standard return but against the Consumer Retailing industry average of 18%, it’s not as good.

View our latest analysis for KAL Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating KAL Group’s past further, check out this free graph covering KAL Group’s past earnings, revenue and cash flow.

The trend of ROCE doesn’t stand out much, but returns on a whole are decent. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 119% in that time. 14% is a pretty standard return, and it provides some comfort knowing that KAL Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, KAL Group has done well to reduce current liabilities to 43% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We’d like to see this trend continue though because as it stands today, thats still a pretty high level.

The main thing to remember is that KAL Group has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 117% return to those who’ve held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.