Sudatel Telecom Group (ADX:SUDATEL) Has Some Difficulty Using Its Capital Effectively

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Sudatel Telecom Group (ADX:SUDATEL), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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 Sudatel Telecom Group is:

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

0.095 = US$71m ÷ (US$1.1b - US$335m) (Based on the trailing twelve months to September 2022).

So, Sudatel Telecom Group has an ROCE of 9.5%. On its own, that's a low figure but it's around the 11% average generated by the Telecom industry.

View 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're interested in investigating Sudatel Telecom Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sudatel Telecom Group's ROCE Trending?

We are a bit worried about the trend of returns on capital at Sudatel Telecom Group. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sudatel Telecom Group becoming one if things continue as they have.

What We Can Learn From Sudatel Telecom Group's ROCE

In summary, it's unfortunate that Sudatel Telecom Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 19% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Sudatel Telecom Group (including 1 which can't be ignored) .

While Sudatel Telecom Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.