Some Investors May Be Worried About Cellularline's (BIT:CELL) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Cellularline (BIT:CELL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Cellularline:

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

-0.016 = -€4.0m ÷ (€294m - €40m) (Based on the trailing twelve months to December 2020).

Thus, Cellularline has an ROCE of -1.6%. Ultimately, that's a low return and it under-performs the Tech industry average of 7.4%.

Check out our latest analysis for Cellularline

Above you can see how the current ROCE for Cellularline 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 Cellularline here for free.

What Does the ROCE Trend For Cellularline Tell Us?

In terms of Cellularline's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about Cellularline because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 15% return to shareholders over the last year, so investors might be expecting the trends to turn around. 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 want to continue researching Cellularline, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Cellularline 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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