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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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.

Return On Capital Employed (ROCE): What Is It?

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)

0.098 = S$218m ÷ (S$3.3b - S$1.0b) (Based on the trailing twelve months to June 2022).

Thus, StarHub has an ROCE of 9.8%. On its own, that's a low figure but it's around the 9.1% average generated by the Wireless Telecom industry.

Check out our latest analysis for StarHub

In the above chart we have measured StarHub's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering StarHub here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at StarHub doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.8% from 25% 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.

The Bottom Line On StarHub's ROCE

Bringing it all together, while we're somewhat encouraged by StarHub's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching StarHub, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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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.