Does Kansas City Southern (NYSE: KSU) have what it takes to become a multi-bagger?

To find a multi-bagger stock, what are the underlying trends to look for in a business? Generally, we will want to notice a growing trend come back on capital employed (ROCE) and at the same time, a based capital employed. Ultimately, this demonstrates that it is a company that reinvests profits at increasing rates of return. With this in mind, the ROCE of Kansas City South (NYSE: KSU) looks decent, right now, so let’s see what the yield trend can tell us.

What is Return on Capital Employed (ROCE)?

For those who are unsure of what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Kansas City Southern:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.11 = 1.0 billion USD ÷ (10 billion USD – 477 million USD) (Based on the last twelve months up to September 2020).

Therefore, Kansas City Southern has a ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 9.8% generated by the transportation industry.

Check out our latest analysis for Kansas City Southern

In the graph above, we’ve measured Kansas City Southern’s past ROCE versus past performance, but arguably the future is more important. If you want to see what analysts are forecasting for the future, you should check out our free report for Kansas City Southern.

What does the ROCE trend tell us for Kansas City Southern?

The ROCE trend doesn’t stand out much, but overall returns are okay. Over the past five years, ROCE has remained relatively stable at around 11% and the company has deployed 26% additional capital in its operations. Since 11% is moderate ROCE, it’s good to see that a company can keep reinvesting at these decent rates of return. Stable returns at this stage may be unattractive, but if they can be sustained over the long term, they often offer great rewards for shareholders.

The bottom line

The main thing to remember is that Kansas City Southern has a proven ability to continually reinvest at respectable rates of return. And the stock has performed incredibly well with an 187% return over the past five years, so long-term investors are no doubt thrilled with the result. So while the positive underlying trends can be explained by investors, we still think this action is worth looking into.

Like most businesses, Kansas City Southern comes with some risk, and we’ve found 2 warning signs of which you should be aware.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

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This Simply Wall St article is general in nature. It is not a recommendation to buy or sell stocks, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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