Slowing Rates Of Return At Satcom Systems (TLV:STCM) Leave Little Room For Excitement

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Satcom Systems (TLV:STCM), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Satcom Systems:

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

0.089 = US$3.4m ÷ (US$74m - US$36m) (Based on the trailing twelve months to December 2020).

Thus, Satcom Systems has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Telecom industry average of 9.6%.

See our latest analysis for Satcom Systems

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're interested in investigating Satcom Systems' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Satcom Systems' ROCE Trend?

The returns on capital haven't changed much for Satcom Systems in recent years. Over the past five years, ROCE has remained relatively flat at around 8.9% and the business has deployed 161% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another thing to note, Satcom Systems has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Long story short, while Satcom Systems has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

One final note, you should learn about the 5 warning signs we've spotted with Satcom Systems (including 2 which are concerning) .

While Satcom Systems 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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