Here's What To Make Of Telkom SA SOC's (JSE:TKG) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Telkom SA SOC's (JSE:TKG) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Telkom SA SOC is:

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

0.11 = R5.0b ÷ (R64b - R17b) (Based on the trailing twelve months to March 2021).

Therefore, Telkom SA SOC has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out our latest analysis for Telkom SA SOC

Above you can see how the current ROCE for Telkom SA SOC compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 39% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Telkom SA SOC has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Telkom SA SOC's ROCE

In the end, Telkom SA SOC has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 18%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you'd like to know about the risks facing Telkom SA SOC, we've discovered 1 warning sign that you should be aware of.

While Telkom SA SOC 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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