Should You Be Impressed By CITIC Telecom International Holdings' (HKG:1883) Returns on Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Although, when we looked at CITIC Telecom International Holdings (HKG:1883), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for CITIC Telecom International Holdings:

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

0.099 = HK$1.6b ÷ (HK$19b - HK$2.6b) (Based on the trailing twelve months to June 2020).

So, CITIC Telecom International Holdings has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Telecom industry average of 5.7%.

See our latest analysis for CITIC Telecom International Holdings

In the above chart we have measured CITIC Telecom International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CITIC Telecom International Holdings.

The Trend Of ROCE

Things have been pretty stable at CITIC Telecom International Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if CITIC Telecom International Holdings doesn't end up being a multi-bagger in a few years time. On top of that you'll notice that CITIC Telecom International Holdings has been paying out a large portion (74%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line On CITIC Telecom International Holdings' ROCE

In summary, CITIC Telecom International Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 13% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 1 warning sign for CITIC Telecom International Holdings you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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