Advertisement
Canada markets closed
  • S&P/TSX

    22,851.17
    -144.22 (-0.63%)
     
  • S&P 500

    5,588.27
    -78.93 (-1.39%)
     
  • DOW

    41,198.08
    +243.60 (+0.59%)
     
  • CAD/USD

    0.7307
    -0.0007 (-0.10%)
     
  • CRUDE OIL

    82.93
    +2.17 (+2.69%)
     
  • Bitcoin CAD

    88,453.60
    -416.45 (-0.47%)
     
  • CMC Crypto 200

    1,339.06
    -3.26 (-0.24%)
     
  • GOLD FUTURES

    2,461.60
    -6.20 (-0.25%)
     
  • RUSSELL 2000

    2,239.67
    -24.00 (-1.06%)
     
  • 10-Yr Bond

    4.1460
    -0.0210 (-0.50%)
     
  • NASDAQ

    17,996.92
    -512.42 (-2.77%)
     
  • VOLATILITY

    14.48
    +1.29 (+9.79%)
     
  • FTSE

    8,187.46
    +22.56 (+0.28%)
     
  • NIKKEI 225

    41,097.69
    -177.39 (-0.43%)
     
  • CAD/EUR

    0.6677
    -0.0031 (-0.46%)
     

Returns On Capital At Keg Royalties Income Fund (TSE:KEG.UN) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Keg Royalties Income Fund (TSE:KEG.UN) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Keg Royalties Income Fund:

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

0.072 = CA$18m ÷ (CA$254m - CA$1.9m) (Based on the trailing twelve months to September 2021).

ADVERTISEMENT

Thus, Keg Royalties Income Fund has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Hospitality industry average of 8.0%.

View our latest analysis for Keg Royalties Income Fund

roce
roce

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'd like to look at how Keg Royalties Income Fund has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Keg Royalties Income Fund, given the returns are trending downwards. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Keg Royalties Income Fund becoming one if things continue as they have.

The Bottom Line On Keg Royalties Income Fund'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 must expect better things on the horizon though because the stock has risen 5.1% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Keg Royalties Income Fund, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.

While Keg Royalties Income Fund 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.

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.

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