We Like These Underlying Return On Capital Trends At CITIC Telecom International Holdings (HKG:1883)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in CITIC Telecom International Holdings' (HKG:1883) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for CITIC Telecom International Holdings, this is the formula:

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

0.12 = HK$1.3b ÷ (HK$17b - HK$6.1b) (Based on the trailing twelve months to June 2024).

Therefore, CITIC Telecom International Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Telecom industry.

See our latest analysis for CITIC Telecom International Holdings

Above you can see how the current ROCE for CITIC Telecom International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CITIC Telecom International Holdings .

The Trend Of ROCE

CITIC Telecom International Holdings has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 28%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, CITIC Telecom International Holdings appears to been achieving more with less, since the business is using 32% less capital to run its operation. CITIC Telecom International Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 36% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From CITIC Telecom International Holdings' ROCE

In summary, it's great to see that CITIC Telecom International Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 25% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 1 warning sign with CITIC Telecom International Holdings and understanding this should be part of your investment process.

While CITIC Telecom International 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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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.