Koninklijke KPN (AMS:KPN) Is Looking To Continue Growing Its Returns On Capital
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Koninklijke KPN's (AMS:KPN) returns on capital, so let's have a look.
Understanding 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 Koninklijke KPN, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €1.2b ÷ (€12b - €1.6b) (Based on the trailing twelve months to September 2022).
Thus, Koninklijke KPN has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 9.3% it's much better.
Check out our latest analysis for Koninklijke KPN
Above you can see how the current ROCE for Koninklijke KPN 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 Koninklijke KPN here for free.
How Are Returns Trending?
Koninklijke KPN has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 31% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line
As discussed above, Koninklijke KPN appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 37% 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.
On a final note, we've found 3 warning signs for Koninklijke KPN that we think you should be aware of.
While Koninklijke KPN may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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