Returns On Capital Are Showing Encouraging Signs At Central Telegraph (MCX:CNTL)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Central Telegraph's (MCX:CNTL) returns on capital, so let's have a look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Central Telegraph is:

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

0.017 = ₽13m ÷ (₽1.3b - ₽466m) (Based on the trailing twelve months to December 2020).

Therefore, Central Telegraph has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Telecom industry average of 9.5%.

Check out our latest analysis for Central Telegraph

Historical performance is a great place to start when researching a stock so above you can see the gauge for Central Telegraph's ROCE against it's prior returns. If you'd like to look at how Central Telegraph has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

It's great to see that Central Telegraph has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.7% on their capital employed. In regards to capital employed, Central Telegraph is using 64% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

Our Take On Central Telegraph's ROCE

In summary, it's great to see that Central Telegraph has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 119% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 3 warning signs with Central Telegraph and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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