Returns On Capital Signal Tricky Times Ahead For StarHub (SGX:CC3)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think StarHub (SGX:CC3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for StarHub:

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

0.091 = S$197m ÷ (S$2.9b - S$773m) (Based on the trailing twelve months to December 2020).

Thus, StarHub has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.

View our latest analysis for StarHub

Above you can see how the current ROCE for StarHub compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From StarHub's ROCE Trend?

In terms of StarHub's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 50%, but since then they've fallen to 9.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, StarHub has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

We're a bit apprehensive about StarHub because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 49% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, StarHub does come with some risks, and we've found 3 warning signs that you should be aware of.

While StarHub isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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