Investors Could Be Concerned With Chief Telecom's (GTSM:6561) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Chief Telecom (GTSM:6561) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Chief Telecom:

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

0.19 = NT$777m ÷ (NT$4.8b - NT$572m) (Based on the trailing twelve months to December 2020).

Thus, Chief Telecom has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Telecom industry.

View our latest analysis for Chief Telecom

In the above chart we have measured Chief Telecom'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 Chief Telecom here for free.

So How Is Chief Telecom's ROCE Trending?

On the surface, the trend of ROCE at Chief Telecom doesn't inspire confidence. Over the last five years, returns on capital have decreased to 19% from 29% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Chief Telecom has decreased its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On Chief Telecom's ROCE

Bringing it all together, while we're somewhat encouraged by Chief Telecom's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 61% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Chief Telecom does come with some risks, and we've found 1 warning sign that you should be aware of.

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This article by Simply Wall St is general in nature. 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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