Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Telecom Service One Holdings (HKG:3997), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Telecom Service One Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0053 = HK$509k ÷ (HK$100m - HK$3.7m) (Based on the trailing twelve months to March 2021).
Thus, Telecom Service One Holdings has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Telecom Service One Holdings' ROCE against it's prior returns. If you're interested in investigating Telecom Service One Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Telecom Service One Holdings Tell Us?
When we looked at the ROCE trend at Telecom Service One Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 0.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Telecom Service One Holdings has decreased its current liabilities to 3.7% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
From the above analysis, we find it rather worrisome that returns on capital and sales for Telecom Service One Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Telecom Service One Holdings does have some risks, we noticed 5 warning signs (and 2 which are potentially serious) we think you should know about.
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.
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.
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