Is SmarTone Telecommunications Holdings (HKG:315) Headed For Trouble?

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at SmarTone Telecommunications Holdings (HKG:315), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on SmarTone Telecommunications Holdings is:

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

0.08 = HK$604m ÷ (HK$10b - HK$2.9b) (Based on the trailing twelve months to June 2020).

Therefore, SmarTone Telecommunications Holdings has an ROCE of 8.0%. Even though it's in line with the industry average of 8.4%, it's still a low return by itself.

Check out our latest analysis for SmarTone Telecommunications Holdings

In the above chart we have measured SmarTone Telecommunications Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SmarTone Telecommunications Holdings here for free.

What Does the ROCE Trend For SmarTone Telecommunications Holdings Tell Us?

In terms of SmarTone Telecommunications Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 17%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SmarTone Telecommunications Holdings becoming one if things continue as they have.

Our Take On SmarTone Telecommunications Holdings' ROCE

In summary, it's unfortunate that SmarTone Telecommunications Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 50% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with SmarTone Telecommunications Holdings and understanding it should be part of your investment process.

While SmarTone Telecommunications 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. 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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