Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 the ROCE trend of Keg Royalties Income Fund (TSE:KEG.UN) we really liked what we saw.
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. To calculate this metric for Keg Royalties Income Fund, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.28 = CA$33m ÷ (CA$260m – CA$141m) (Based on the trailing twelve months to December 2024).
So, Keg Royalties Income Fund has an ROCE of 28%. In absolute terms that’s a great return and it’s even better than the Hospitality industry average of 9.3%.
View our latest analysis for Keg Royalties Income Fund
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Keg Royalties Income Fund.
You’d find it hard not to be impressed with the ROCE trend at Keg Royalties Income Fund. The data shows that returns on capital have increased by 128% over the trailing five years. That’s not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it’s applying 51% 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.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 54% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it’s pretty high ratio, we’d remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
In summary, it’s great to see that Keg Royalties Income Fund has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 154% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
