Investors Shouldn't Overlook The Favourable Returns On Capital At Telecom Digital Holdings (HKG:6033)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So, when we ran our eye over Telecom Digital Holdings' (HKG:6033) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Telecom Digital Holdings is:

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

0.25 = HK$101m ÷ (HK$660m - HK$264m) (Based on the trailing twelve months to September 2020).

Thus, Telecom Digital Holdings has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 9.6%.

View our latest analysis for Telecom Digital Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Telecom Digital Holdings' ROCE against it's prior returns. If you're interested in investigating Telecom Digital Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Telecom Digital Holdings Tell Us?

Telecom Digital Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 25% and the business has deployed 85% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Telecom Digital Holdings can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 40% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On Telecom Digital Holdings' ROCE

Telecom Digital Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Telecom Digital Holdings does have some risks though, and we've spotted 1 warning sign for Telecom Digital Holdings that you might be interested in.

Telecom Digital Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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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