Yahoo Finance Knowles (NYSE:KN) Might Have The Makings Of A Multi-Bagger
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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Knowles (NYSE:KN) so let's look a bit deeper.
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. The formula for this calculation on Knowles is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = US$96m ÷ (US$1.2b - US$99m) (Based on the trailing twelve months to December 2022).
Thus, Knowles has an ROCE of 8.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.
See our latest analysis for Knowles
Above you can see how the current ROCE for Knowles compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Knowles here for free.
How Are Returns Trending?
You'd find it hard not to be impressed with the ROCE trend at Knowles. The figures show that over the last five years, returns on capital have grown by 56%. The company is now earning US$0.09 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
Our Take On Knowles' ROCE
In the end, Knowles has proven it's capital allocation skills are good with those higher returns from less amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 32% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
While Knowles looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether KN is currently trading for a fair price.
While Knowles 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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