The Return Trends At Kinatico (ASX:KYP) Look Promising

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a day ago

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Kinatico's (ASX:KYP) returns on capital, so let's have a look.
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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. The formula for this calculation on Kinatico is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = AU$919k ÷ (AU$33m - AU$6.6m) (Based on the trailing twelve months to December 2024).
Thus, Kinatico has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 5.7%.
Check out our latest analysis for Kinatico
In the above chart we have measured Kinatico's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Kinatico .
What Can We Tell From Kinatico's ROCE Trend?
The fact that Kinatico is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.4% on its capital. In addition to that, Kinatico is employing 282% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line
To the delight of most shareholders, Kinatico has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 2 warning signs facing Kinatico that you might find interesting.
While Kinatico 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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