Investors Met With Slowing Returns on Capital At HKT Trust and HKT (HKG:6823)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. 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)

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 HKT Trust and HKT is:

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

0.076 = HK$7.1b ÷ (HK$110b - HK$16b) (Based on the trailing twelve months to December 2021).

Thus, HKT Trust and HKT has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 6.1% generated by the Telecom industry, it's much better.

View our latest analysis for HKT Trust and HKT

Above you can see how the current ROCE for HKT Trust and HKT 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 report for HKT Trust and HKT.

What Can We Tell From HKT Trust and HKT's ROCE Trend?

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. With that in mind, unless investment picks up again in the future, we wouldn't expect HKT Trust and HKT to be a multi-bagger going forward. That probably explains why HKT Trust and HKT has been paying out 118% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line On HKT Trust and HKT's ROCE

In a nutshell, HKT Trust and HKT has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing HKT Trust and HKT we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While HKT Trust and HKT 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. 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.