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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at HKT Trust and HKT (HKG:6823) and its ROCE trend, we weren't exactly thrilled.

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Understanding Return On Capital Employed (ROCE)

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. 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)

0.091 = HK$8.2b ÷ (HK$117b - HK$26b) (Based on the trailing twelve months to December 2024).

So, HKT Trust and HKT has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 7.3% generated by the Telecom industry, it's much better.

See 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, you can check out the forecasts from the analysts covering HKT Trust and HKT for free.

The Trend Of ROCE

Over the past five years, HKT Trust and HKT's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if HKT Trust and HKT doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that HKT Trust and HKT has been paying out 121% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

What We Can Learn From HKT Trust and HKT's ROCE

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 47% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

HKT Trust and HKT does have some risks though, and we've spotted 3 warning signs for HKT Trust and HKT that you might be interested in.

While HKT Trust and HKT 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.