Is Hrvatski Telekom d.d (ZGSE:HT) Shrinking?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Hrvatski Telekom d.d (ZGSE:HT), the trends above didn't look too great.

What is 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. Analysts use this formula to calculate it for Hrvatski Telekom d.d:

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

0.067 = Kn920m ÷ (Kn16b - Kn2.0b) (Based on the trailing twelve months to September 2020).

Therefore, Hrvatski Telekom d.d has an ROCE of 6.7%. On its own, that's a low figure but it's around the 8.2% average generated by the Telecom industry.

See our latest analysis for Hrvatski Telekom d.d

In the above chart we have measured Hrvatski Telekom d.d'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 Hrvatski Telekom d.d.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Hrvatski Telekom d.d. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hrvatski Telekom d.d becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 59% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Hrvatski Telekom d.d (including 1 which is is concerning) .

While Hrvatski Telekom d.d 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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