Should We Be Excited About The Trends Of Returns At SK TelecomLtd (KRX:017670)?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think SK TelecomLtd (KRX:017670) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for SK TelecomLtd, this is the formula:

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

0.034 = ₩1.3t ÷ (₩48t - ₩8.2t) (Based on the trailing twelve months to December 2020).

So, SK TelecomLtd has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 8.7%.

See our latest analysis for SK TelecomLtd

In the above chart we have measured SK TelecomLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SK TelecomLtd.

What Can We Tell From SK TelecomLtd's ROCE Trend?

On the surface, the trend of ROCE at SK TelecomLtd doesn't inspire confidence. Around five years ago the returns on capital were 6.8%, but since then they've fallen to 3.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by SK TelecomLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 37% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching SK TelecomLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While SK TelecomLtd 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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