Will StarTek (NYSE:SRT) Multiply In Value Going Forward?

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. Having said that, from a first glance at StarTek (NYSE:SRT) 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. Analysts use this formula to calculate it for StarTek:

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

0.046 = US$20m ÷ (US$607m - US$172m) (Based on the trailing twelve months to September 2020).

Thus, StarTek has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.

See our latest analysis for StarTek

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

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because StarTek's ROCE has reduced by 81% over the last four years, while the business employed 492% more capital. Usually this isn't ideal, but given StarTek conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. StarTek probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, StarTek has done well to pay down its current liabilities to 28% of total assets. Since the ratio used to be 82%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by StarTek's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 46% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with StarTek and understanding it should be part of your investment process.

While StarTek 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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