Some Investors May Be Worried About SmarTone Telecommunications Holdings' (HKG:315) Returns On Capital

When researching a stock for investment, what can tell us that the company is 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into SmarTone Telecommunications Holdings (HKG:315), the trends above didn't look too great.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SmarTone Telecommunications Holdings:

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

0.083 = HK$630m ÷ (HK$10b - HK$2.7b) (Based on the trailing twelve months to December 2020).

So, SmarTone Telecommunications Holdings has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Wireless Telecom industry average of 8.7%.

View 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 to see what analysts are forecasting going forward, you should check out our free report for SmarTone Telecommunications Holdings.

What Can We Tell From SmarTone Telecommunications Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at SmarTone Telecommunications Holdings. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. 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 SmarTone Telecommunications Holdings to turn into a multi-bagger.

In Conclusion...

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 52% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

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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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