China Telecom (HKG:728) Has More To Do To Multiply In Value Going Forward

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Having said that, from a first glance at China Telecom (HKG:728) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for China Telecom:

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

0.077 = CN¥35b ÷ (CN¥714b - CN¥263b) (Based on the trailing twelve months to March 2021).

So, China Telecom has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Telecom industry average of 4.8%.

View our latest analysis for China Telecom

In the above chart we have measured China Telecom's 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 China Telecom.

The Trend Of ROCE

Things have been pretty stable at China Telecom, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if China Telecom doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that China Telecom has been paying out a decent 60% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

What We Can Learn From China Telecom's ROCE

We can conclude that in regards to China Telecom's returns on capital employed and the trends, there isn't much change to report on. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you're still interested in China Telecom it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While China Telecom 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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