Kennametal (NYSE:KMT) Has Some Difficulty Using Its Capital Effectively

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Kennametal (NYSE:KMT), so let's see why.

What Is 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. To calculate this metric for Kennametal, this is the formula:

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

0.091 = US$194m ÷ (US$2.5b - US$414m) (Based on the trailing twelve months to December 2023).

So, Kennametal has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 13%.

See our latest analysis for Kennametal

roce

In the above chart we have measured Kennametal's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kennametal .

What Does the ROCE Trend For Kennametal Tell Us?

We are a bit worried about the trend of returns on capital at Kennametal. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kennametal becoming one if things continue as they have.

The Bottom Line On Kennametal's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Kennametal could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for KMT on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.