There Are Reasons To Feel Uneasy About Telestrada's (WSE:TLS) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Telestrada (WSE:TLS) 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)?

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. The formula for this calculation on Telestrada is:

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

0.13 = zł4.9m ÷ (zł42m - zł4.6m) (Based on the trailing twelve months to March 2021).

Therefore, Telestrada has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 5.3% it's much better.

View our latest analysis for Telestrada

Historical performance is a great place to start when researching a stock so above you can see the gauge for Telestrada's ROCE against it's prior returns. If you're interested in investigating Telestrada's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Telestrada's ROCE Trend?

When we looked at the ROCE trend at Telestrada, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 36% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Telestrada has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Telestrada's ROCE

Bringing it all together, while we're somewhat encouraged by Telestrada's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 100% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Telestrada, we've spotted 5 warning signs, and 1 of them makes us a bit uncomfortable.

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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