Nera Telecommunications (SGX:N01) Could Be At Risk Of Shrinking As A Company

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Nera Telecommunications (SGX:N01), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nera Telecommunications is:

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

0.018 = S$1.2m ÷ (S$144m - S$78m) (Based on the trailing twelve months to June 2021).

So, Nera Telecommunications has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Communications industry average of 6.7%.

Check out our latest analysis for Nera Telecommunications

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

So How Is Nera Telecommunications' ROCE Trending?

We are a bit worried about the trend of returns on capital at Nera Telecommunications. To be more specific, the ROCE was 20% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nera Telecommunications becoming one if things continue as they have.

Another thing to note, Nera Telecommunications has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 65% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Nera Telecommunications does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Nera Telecommunications 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.
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