What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Kyndryl Holdings (NYSE:KD) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kyndryl Holdings is:

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

0.056 = US$344m ÷ (US$10b - US$4.2b) (Based on the trailing twelve months to September 2024).

Thus, Kyndryl Holdings has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

See our latest analysis for Kyndryl Holdings

Above you can see how the current ROCE for Kyndryl Holdings 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 Kyndryl Holdings for free.

What Does the ROCE Trend For Kyndryl Holdings Tell Us?

Shareholders will be relieved that Kyndryl Holdings has broken into profitability. The company now earns 5.6% on its capital, because four years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Kyndryl Holdings has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Kyndryl Holdings' ROCE

In summary, we're delighted to see that Kyndryl Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 80% return over the last three years. In light of that, we think it's worth looking further into this stock because if Kyndryl Holdings can keep these trends up, it could have a bright future ahead.

While Kyndryl Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic for KD helps visualize whether it is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.