Mediaboss Marketing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in KnowBe4's (NASDAQ:KNBE) returns on capital, so let's have a look.

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. The formula for this calculation on KnowBe4 is:

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

0.034 = US$12m (US$606m - US$259m) (Based on the trailing twelve months to June 2022).

Thus, KnowBe4 has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.

View our latest analysis for KnowBe4

Above you can see how the current ROCE for KnowBe4 compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering KnowBe4 here for free.

The fact that KnowBe4 is now generating some pre-tax profits from its prior investments is very encouraging. About three years ago the company was generating losses but things have turned around because it's now earning 3.4% on its capital. In addition to that, KnowBe4 is employing 581% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 43%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In summary, it's great to see that KnowBe4 has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 15% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing KnowBe4 that you might find interesting.

While KnowBe4 isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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Returns At KnowBe4 (NASDAQ:KNBE) Are On The Way Up - Simply Wall St