Can APT Satellite Holdings (HKG:1045) Turn Things Around?

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, APT Satellite Holdings (HKG:1045) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for APT Satellite Holdings, this is the formula:

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

0.042 = HK$285m ÷ (HK$7.0b - HK$278m) (Based on the trailing twelve months to June 2020).

Thus, APT Satellite Holdings has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Telecom industry average of 5.7%.

See our latest analysis for APT Satellite Holdings

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

How Are Returns Trending?

In terms of APT Satellite Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect APT Satellite Holdings to turn into a multi-bagger.

On a related note, APT Satellite Holdings has decreased its current liabilities to 4.0% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From APT Satellite Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 50% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with APT Satellite Holdings (at least 1 which is concerning) , and understanding them would certainly be useful.

While APT Satellite Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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