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Kratos Defense & Security Solutions (NASDAQ:KTOS) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Kratos Defense & Security Solutions (NASDAQ:KTOS) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kratos Defense & Security Solutions:

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

0.018 = US$25m ÷ (US$1.6b - US$228m) (Based on the trailing twelve months to June 2022).

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Therefore, Kratos Defense & Security Solutions has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 8.8%.

See our latest analysis for Kratos Defense & Security Solutions

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In the above chart we have measured Kratos Defense & Security Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kratos Defense & Security Solutions here for free.

The Trend Of ROCE

Kratos Defense & Security Solutions has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.8% on its capital. In addition to that, Kratos Defense & Security Solutions is employing 77% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Kratos Defense & Security Solutions' ROCE

To the delight of most shareholders, Kratos Defense & Security Solutions has now broken into profitability. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

While Kratos Defense & Security Solutions looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether KTOS is currently trading for a fair price.

While Kratos Defense & Security Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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