Telkom SA SOC's (JSE:TKG) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Telkom SA SOC (JSE:TKG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Telkom SA SOC is:

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

0.07 = R3.4b ÷ (R67b - R18b) (Based on the trailing twelve months to September 2022).

Therefore, Telkom SA SOC has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 9.3%.

See our latest analysis for Telkom SA SOC

In the above chart we have measured Telkom SA SOC'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 Telkom SA SOC here for free.

SWOT Analysis for Telkom SA SOC

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Telkom SA SOC, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.0%. However it looks like Telkom SA SOC might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Telkom SA SOC's ROCE

In summary, Telkom SA SOC is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Telkom SA SOC does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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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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.