Sudatel Telecom Group (ADX:SUDATEL) Has More To Do To Multiply In Value Going Forward

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Sudatel Telecom Group (ADX:SUDATEL), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sudatel Telecom Group, this is the formula:

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

0.10 = US$47m ÷ (US$922m - US$473m) (Based on the trailing twelve months to March 2024).

So, Sudatel Telecom Group has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Telecom industry average of 11%.

Check out our latest analysis for Sudatel Telecom Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sudatel Telecom Group's ROCE against it's prior returns. If you'd like to look at how Sudatel Telecom Group has performed in the past in other metrics, you can view this free graph of Sudatel Telecom Group's past earnings, revenue and cash flow.

What Can We Tell From Sudatel Telecom Group's ROCE Trend?

Things have been pretty stable at Sudatel Telecom Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Sudatel Telecom Group doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 51% of total assets, this reported ROCE would probably be less than10% because total capital employed would be higher.The 10% ROCE could be even lower if current liabilities weren't 51% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On Sudatel Telecom Group's ROCE

In summary, Sudatel Telecom Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 4.2% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Sudatel Telecom Group we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.