HKT Trust and HKT's (HKG:6823) Returns Have Hit A Wall

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating HKT Trust and HKT (HKG:6823), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for HKT Trust and HKT, this is the formula:

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

0.082 = HK$7.2b ÷ (HK$103b - HK$15b) (Based on the trailing twelve months to December 2020).

Thus, HKT Trust and HKT has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Telecom industry average of 5.7%.

Check out our latest analysis for HKT Trust and HKT

In the above chart we have measured HKT Trust and HKT's 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 HKT Trust and HKT here for free.

What Does the ROCE Trend For HKT Trust and HKT Tell Us?

Things have been pretty stable at HKT Trust and HKT, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at HKT Trust and HKT in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. On top of that you'll notice that HKT Trust and HKT has been paying out a large portion (110%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

In Conclusion...

In summary, HKT Trust and HKT isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 42% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about HKT Trust and HKT, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

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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