Can Space-Communication (TLV:SCC) Turn Things Around?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Space-Communication (TLV:SCC) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Space-Communication is:

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

0.018 = US$9.6m ÷ (US$594m - US$52m) (Based on the trailing twelve months to September 2020).

Therefore, Space-Communication has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 9.8%.

See our latest analysis for Space-Communication

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Space-Communication, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Space-Communication, given the returns are trending downwards. About five years ago, returns on capital were 2.8%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Space-Communication to turn into a multi-bagger.

The Bottom Line On Space-Communication's ROCE

In summary, it's unfortunate that Space-Communication is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 88% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Space-Communication we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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