Can Kelly Partners Group Holdings (ASX:KPG) Sustain Its High ROE Amid Rising Debt Risk?

Kelly Partners Group Holdings (ASX:KPG) has emerged as a standout performer in the commercial services sector, with a Return on Equity (ROE) of 27.66% in the trailing twelve months (TTM) [5] and a peak ROE of 38.8% in Q2 2025 [2]. These figures suggest exceptional efficiency in deploying shareholder capital. However, the company’s aggressive growth strategy—driven by acquisitions and organic expansion—has raised concerns about sustainability. With a net debt-to-equity ratio of 153.26% [1] and a net debt-to-EBITDA ratio of 1.42x [1], KPG’s leverage metrics have edged higher, signaling a delicate balance between capital allocation and financial risk.

The company’s recent financial performance underscores this duality. Revenue surged 24.5% year-over-year to $134.6 million in FY2025, fueled by 20% growth from acquisitions and 4.5% organic gains [1]. EBITDA rose 19.2% to $38.1 million, maintaining strong margins [1]. Yet, the cost of this growth is evident in its debt profile. Net debt increased by $13.3 million, pushing the debt-to-FCF ratio to 3.53 [5], a level that could strain financial flexibility during economic downturns. While KPG’s cash from operations grew by 23.3%, providing $23.7 million in headroom [2], the rising debt burden raises questions about long-term sustainability.

A critical metric to evaluate is Return on Capital Employed (ROCE), which measures a company’s efficiency in generating profits from its capital. KPG’s ROCE of 18.16% in Q2 2025 [3] appears robust at first glance, but this masks a declining trend. For instance, its ROE has fluctuated wildly over the past year, ranging from a high of 32.98% to a low of -23.87% [4], with the current ROE at 13.52% [4]. This volatility, coupled with a ROCE of 12.81% in some reports [4], suggests that KPG’s capital efficiency is eroding. The company’s WACC of 6.82% [4] indicates it should generate excess returns, but the narrowing gap between ROCE and WACC implies diminishing margins of safety.

The sustainability of KPG’s high ROE hinges on its ability to manage leverage while maintaining profitability. Its debt-to-equity ratio of 153.26% [1]—far exceeding the user’s cited 1.05—reflects a capital structure heavily reliant on debt. While this has amplified returns in the short term, it exposes the company to interest rate risks and potential downgrades in credit ratings. For investors, the key question is whether KPG’s disciplined capital allocation—evidenced by a 25% revenue increase and a $150 million run rate [2]—can offset the growing debt burden.

Long-term implications for investors are mixed. On one hand, KPG’s strong operating margins (19.59% operating margin [4]) and strategic acquisitions position it for continued growth. On the other, the declining ROCE and elevated leverage metrics suggest a higher risk of margin compression. Insider selling activity [5] further clouds confidence, hinting at potential misalignment between management and shareholders.

In conclusion, KPG’s impressive ROE is a double-edged sword. While its profitability metrics remain attractive, the rising debt risk and volatile ROCE trends necessitate caution. Investors should monitor the company’s ability to deleverage while sustaining growth, as well as its response to macroeconomic headwinds. For now, KPG offers a compelling but high-risk proposition in a sector where capital discipline is paramount.

Source:
[1] Kelly Partners Group Holdings Limited (KPG.AX) Valuation [https://finance.yahoo.com/quote/KPG.AX/key-statistics/]
[2] Partners Group sees performance fees making up 25% to ... [https://www.ainvest.com/news/partners-group-sees-performance-fees-making-25-40-revenue-2509/]
[3] Kelly Partners Group Holdings (ASX:KPG) Statistics & ... [https://stockanalysis.com/quote/asx/KPG/statistics/]
[4] Kelly Partners Group Holdings (ASX:KPG) ROE % [https://www.gurufocus.com/term/roe/ASX:KPG]
[5] Kelly Partners Group Holdings (ASX:KPG) - Stock Analysis [https://simplywall.st/stocks/au/commercial-services/asx-kpg/kelly-partners-group-holdings-shares]