These Return Metrics Don't Make Hrvatski Telekom d.d (ZGSE:HT) Look Too Strong

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Hrvatski Telekom d.d (ZGSE:HT), we've spotted some signs that it could be struggling, so let's investigate.

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 = Kn917m ÷ (Kn16b - Kn1.8b) (Based on the trailing twelve months to December 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

Above you can see how the current ROCE for Hrvatski Telekom d.d 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 Hrvatski Telekom d.d here for free.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Hrvatski Telekom d.d. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Hrvatski Telekom d.d to turn into a multi-bagger.

What We Can Learn From Hrvatski Telekom d.d's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 63% 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.

If you'd like to know about the risks facing Hrvatski Telekom d.d, we've discovered 1 warning sign that you should be aware of.

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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