Blue Label Telecoms (JSE:BLU) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Blue Label Telecoms (JSE:BLU), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Blue Label Telecoms is:

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

0.078 = R666m ÷ (R16b - R7.0b) (Based on the trailing twelve months to November 2024).

Therefore, Blue Label Telecoms has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 13%.

Check out our latest analysis for Blue Label Telecoms

Historical performance is a great place to start when researching a stock so above you can see the gauge for Blue Label Telecoms' ROCE against it's prior returns. If you're interested in investigating Blue Label Telecoms' past further, check out this free graph covering Blue Label Telecoms' past earnings, revenue and cash flow.

So How Is Blue Label Telecoms' ROCE Trending?

On the surface, the trend of ROCE at Blue Label Telecoms doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.8%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Blue Label Telecoms has done well to pay down its current liabilities to 45% of total assets. So we could link some of this to the decrease 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. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Blue Label Telecoms' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Blue Label Telecoms have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 467%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 1 warning sign for Blue Label Telecoms that we think you should be aware of.

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

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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.