Is Far EasTone Telecommunications (TPE:4904) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. However, after briefly looking over the numbers, we don't think Far EasTone Telecommunications (TPE:4904) 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?

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. Analysts use this formula to calculate it for Far EasTone Telecommunications:

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

0.084 = NT$11b ÷ (NT$169b - NT$34b) (Based on the trailing twelve months to September 2020).

So, Far EasTone Telecommunications has an ROCE of 8.4%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

Check out our latest analysis for Far EasTone Telecommunications

In the above chart we have measured Far EasTone Telecommunications' 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 Far EasTone Telecommunications here for free.

What Can We Tell From Far EasTone Telecommunications' ROCE Trend?

On the surface, the trend of ROCE at Far EasTone Telecommunications doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.4% from 14% 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.

In Conclusion...

In summary, Far EasTone Telecommunications is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 9.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Far EasTone Telecommunications, we've spotted 4 warning signs, and 3 of them are concerning.

While Far EasTone Telecommunications 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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