Should You Be Impressed By SK TelecomLtd's (KRX:017670) Returns on Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Understanding 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 SK TelecomLtd:

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

0.031 = ₩1.2t ÷ (₩46t - ₩7.4t) (Based on the trailing twelve months to September 2020).

So, SK TelecomLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 9.1%.

Check out our latest analysis for SK TelecomLtd

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

So How Is SK TelecomLtd's ROCE Trending?

On the surface, the trend of ROCE at SK TelecomLtd doesn't inspire confidence. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 3.1%. However it looks like SK TelecomLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On SK TelecomLtd's ROCE

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. And with the stock having returned a mere 23% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

While SK TelecomLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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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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