Capital Allocation Trends At Kratos Defense & Security Solutions (NASDAQ:KTOS) Aren’t Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 briefly looking over the numbers, we don’t think Kratos Defense & Security Solutions (NASDAQ:KTOS) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Kratos Defense & Security Solutions, this is the formula:

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

0.019 = US$25m ÷ (US$1.6b – US$263m) (Based on the trailing twelve months to October 2023).

Thus, Kratos Defense & Security Solutions has an ROCE of 1.9%. Ultimately, that’s a low return and it under-performs the Aerospace & Defense industry average of 9.4%.

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 to see what analysts are forecasting going forward, you should check out our free report for Kratos Defense & Security Solutions.

What Can We Tell From Kratos Defense & Security Solutions’ ROCE Trend?

In terms of Kratos Defense & Security Solutions’ historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 3.9% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kratos Defense & Security Solutions. Furthermore the stock has climbed 45% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we’d be optimistic on the stock going forward.

Like most companies, Kratos Defense & Security Solutions does come with some risks, and we’ve found 2 warning signs that you should be aware of.

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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