Hutchison Telecommunications (Australia) (ASX:HTA) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hutchison Telecommunications (Australia) (ASX:HTA) so let's look a bit deeper.

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. The formula for this calculation on Hutchison Telecommunications (Australia) is:

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

0.024 = AU$577k ÷ (AU$75m - AU$51m) (Based on the trailing twelve months to December 2024).

Thus, Hutchison Telecommunications (Australia) has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 12%.

View our latest analysis for Hutchison Telecommunications (Australia)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hutchison Telecommunications (Australia).

How Are Returns Trending?

It's great to see that Hutchison Telecommunications (Australia) has started to generate some pre-tax earnings from prior investments. The company was generating losses four years ago, but now it's turned around, earning 2.4% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 97% less capital than it was four years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 68% of the business, which is more than it was four years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Hutchison Telecommunications (Australia)'s ROCE

From what we've seen above, Hutchison Telecommunications (Australia) has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 80% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One final note, you should learn about the 3 warning signs we've spotted with Hutchison Telecommunications (Australia) (including 1 which is a bit unpleasant) .

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.