We Like These Underlying Return On Capital Trends At NetLink NBN Trust (SGX:CJLU)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in NetLink NBN Trust's (SGX:CJLU) returns on capital, so let's have a look.

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 NetLink NBN Trust is:

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

0.034 = S$128m ÷ (S$3.9b - S$137m) (Based on the trailing twelve months to March 2024).

So, NetLink NBN Trust has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 12%.

See our latest analysis for NetLink NBN Trust

Above you can see how the current ROCE for NetLink NBN Trust compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering NetLink NBN Trust for free.

What Does the ROCE Trend For NetLink NBN Trust Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 58% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On NetLink NBN Trust's ROCE

To sum it up, NetLink NBN Trust is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 34% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing, we've spotted 1 warning sign facing NetLink NBN Trust that you might find interesting.

While NetLink NBN Trust 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.