Returns On Capital At Chunghwa Telecom (TWSE:2412) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at Chunghwa Telecom (TWSE:2412) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. To calculate this metric for Chunghwa Telecom, this is the formula:

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

0.10 = NT$47b ÷ (NT$524b - NT$66b) (Based on the trailing twelve months to December 2023).

Thus, Chunghwa Telecom has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.8%.

Check out our latest analysis for Chunghwa Telecom

In the above chart we have measured Chunghwa Telecom's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Chunghwa Telecom .

What Can We Tell From Chunghwa Telecom's ROCE Trend?

Things have been pretty stable at Chunghwa Telecom, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Chunghwa Telecom to be a multi-bagger going forward. That probably explains why Chunghwa Telecom has been paying out 99% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

The Bottom Line

In a nutshell, Chunghwa Telecom has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 36% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 1 warning sign facing Chunghwa Telecom that you might find interesting.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.