Returns At KAL Group (JSE:KAL) Appear To Be Weighed Down

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That’s why when we briefly looked at KAL Group’s (JSE:KAL) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those who 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. 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)

0.16 = R749m ÷ (R8.4b – R3.7b) (Based on the trailing twelve months to March 2024).

Therefore, KAL Group has an ROCE of 16%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Consumer Retailing industry average of 17%.

View our latest analysis for KAL Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for KAL Group’s ROCE against it’s prior returns. If you’d like to look at how KAL Group has performed in the past in other metrics, you can view this free graph of KAL Group’s past earnings, revenue and cash flow.

How Are Returns Trending?

While the current returns on capital are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 131% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that KAL Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, KAL Group’s current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To sum it up, KAL Group has simply been reinvesting capital steadily, at those decent rates of return. Therefore it’s no surprise that shareholders have earned a respectable 68% return if they held over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.

Story continues

On a final note, we’ve found 2 warning signs for KAL Group that we think you should be aware of.

While KAL Group isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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