We're Watching These Trends At Keywords Studios (LON:KWS)

Simply Wall St
·3 min read

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after investigating Keywords Studios (LON:KWS), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Keywords Studios:

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

0.071 = €27m ÷ (€438m - €63m) (Based on the trailing twelve months to June 2020).

So, Keywords Studios has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the IT industry average of 16%.

Check out our latest analysis for Keywords Studios

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In the above chart we have measured Keywords Studios' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Keywords Studios.

What Can We Tell From Keywords Studios' ROCE Trend?

We weren't thrilled with the trend because Keywords Studios' ROCE has reduced by 49% over the last five years, while the business employed 910% more capital. That being said, Keywords Studios raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Keywords Studios probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

Our Take On Keywords Studios' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Keywords Studios is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 997% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Keywords Studios does come with some risks, and we've found 1 warning sign that you should be aware of.

While Keywords Studios isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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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