If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Kimball Electronics (NASDAQ:KE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Kimball Electronics:

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

0.092 = US$77m ÷ (US$1.2b - US$375m) (Based on the trailing twelve months to June 2024).

So, Kimball Electronics has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Electronic industry average of 9.9%.

View our latest analysis for Kimball Electronics

Above you can see how the current ROCE for Kimball Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Kimball Electronics .

What Can We Tell From Kimball Electronics' ROCE Trend?

There are better returns on capital out there than what we're seeing at Kimball Electronics. Over the past five years, ROCE has remained relatively flat at around 9.2% and the business has deployed 70% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Kimball Electronics' ROCE

In conclusion, Kimball Electronics has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 24% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 3 warning signs with Kimball Electronics and understanding these should be part of your investment process.