Will Helios Towers' (LON:HTWS) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Helios Towers (LON:HTWS) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Helios Towers is:

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

0.072 = US$67m ÷ (US$1.2b - US$224m) (Based on the trailing twelve months to June 2020).

So, Helios Towers has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Telecom industry average of 7.8%.

View our latest analysis for Helios Towers

Above you can see how the current ROCE for Helios Towers 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 Helios Towers here for free.

The Trend Of ROCE

Helios Towers has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 7.2% on its capital, because three 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

To bring it all together, Helios Towers has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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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