Is Space-Communication (TLV:SCC) Set To Make A Turnaround?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Space-Communication (TLV:SCC), so let's see why.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Space-Communication, this is the formula:

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%. Ultimately, that's a low return and it 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.

What Does the ROCE Trend For Space-Communication Tell Us?

In terms of Space-Communication's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 2.8% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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.

Our Take On Space-Communication's ROCE

In summary, it's unfortunate that Space-Communication is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 86% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Space-Communication (including 1 which is a bit concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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