The Returns On Capital At Chorus (NZSE:CNU) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Chorus (NZSE:CNU) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Chorus is:

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

0.044 = NZ$241m ÷ (NZ$6.2b - NZ$690m) (Based on the trailing twelve months to June 2023).

So, Chorus has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 8.1%.

Check out our latest analysis for Chorus

Above you can see how the current ROCE for Chorus compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chorus .

What Does the ROCE Trend For Chorus Tell Us?

We are a bit worried about the trend of returns on capital at Chorus. About five years ago, returns on capital were 5.8%, however they're now substantially lower than that as we saw above. 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 Chorus to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Chorus is generating lower returns from the same amount of capital. However the stock has delivered a 82% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 4 warning signs we've spotted with Chorus (including 2 which are potentially serious) .

While Chorus may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.