If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 StarHub (SGX:CC3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for StarHub:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.098 = S$218m ÷ (S$3.3b - S$1.0b) (Based on the trailing twelve months to June 2022).
Thus, StarHub has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Wireless Telecom industry average of 8.5%.
Check out our latest analysis for StarHub
SGX:CC3 Return on Capital Employed October 18th 2022Above you can see how the current ROCE for StarHub compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering StarHub here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at StarHub doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.8% from 25% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On StarHub's ROCE
To conclude, we've found that StarHub is reinvesting in the business, but returns have been falling. Since the stock has declined 48% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Like most companies, StarHub does come with some risks, and we've found 2 warning signs that you should be aware of.
While StarHub 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.