The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Telestrada SA (WSE:TLS).
Buying Telestrada makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Telestrada is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
What is Return on Capital Employed (ROCE)?
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Telestrada’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Telestrada’s ROCE for you below:
ROCE Calculation for TLS
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = zł10.0m ÷ (zł29.0m – zł10.5m) = 53.9%
As you can see, TLS earned PLN53.9 from every PLN100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Telestrada is currently able to return a fantastic amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.
A deeper look
The encouraging ROCE is good news for Telestrada investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, TLS’s ROCE may deteriorate, in which case your money is better invested elsewhere. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, TLS’s ROCE was 18.0%, which means the company’s capital returns have improved. Over the same period, EBT went from zł5.5m to zł10.0m and the amount of capital employed has declined due to a decreased level of total assets and a larger reliance on current liabilities (increased borrowing to fund operations) , which means that ROCE has increased as a result of Telestrada’s ability to grow earnings in conjunction with increased capital efficiency.
TLS’s investors have enjoyed an upward trend in ROCE and it is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. Telestrada’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for TLS’s future growth? Take a look at our free research report of analyst consensus for TLS’s outlook.
- Valuation: What is TLS worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TLS is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.