Blue Label Telecoms (JSE:BLU) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could 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. However, after briefly looking over the numbers, we don't think Blue Label Telecoms (JSE:BLU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. 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).

So, Blue Label Telecoms has an ROCE of 7.8%. Even though it's in line with the industry average of 7.8%, it's still a low return by itself.

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'd like to look at how Blue Label Telecoms has performed in the past in other metrics, you can view this free graph of Blue Label Telecoms' past earnings, revenue and cash flow.

What Can We Tell From Blue Label Telecoms' ROCE Trend?

On the surface, the trend of ROCE at Blue Label Telecoms doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. 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. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Key Takeaway

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. Since the stock has skyrocketed 216% over the last five years, it looks like investors have high expectations of the stock. 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 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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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.