Here's What We Make Of Telechoice International's (SGX:T41) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Telechoice International (SGX:T41), the trends above didn't look too great.

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 Telechoice International is:

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

0.07 = S$5.0m ÷ (S$138m - S$67m) (Based on the trailing twelve months to June 2020).

Therefore, Telechoice International has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 13%.

See our latest analysis for Telechoice International

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

What Can We Tell From Telechoice International's ROCE Trend?

There is reason to be cautious about Telechoice International, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 17% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Telechoice International becoming one if things continue as they have.

On a side note, Telechoice International has done well to pay down its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Telechoice International's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 2.0% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Telechoice International (including 1 which can't be ignored) .

While Telechoice International 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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