Telecom Digital Holdings' (HKG:6033) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Telecom Digital Holdings (HKG:6033) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Telecom Digital Holdings is:

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

0.17 = HK$89m ÷ (HK$1.3b - HK$788m) (Based on the trailing twelve months to September 2024).

Therefore, Telecom Digital Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Specialty Retail industry.

View our latest analysis for Telecom Digital Holdings

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're interested in investigating Telecom Digital Holdings' past further, check out this free graph covering Telecom Digital Holdings' past earnings, revenue and cash flow.

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

When we looked at the ROCE trend at Telecom Digital Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 35% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 60%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 17%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Telecom Digital Holdings' ROCE

In summary, we're somewhat concerned by Telecom Digital Holdings' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 60% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Telecom Digital Holdings we've found 6 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Telecom Digital Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.