Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at T&S CommunicationsLtd (SZSE:300570) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for T&S CommunicationsLtd:

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

0.14 = CN¥206m ÷ (CN¥1.8b - CN¥388m) (Based on the trailing twelve months to September 2024).

So, T&S CommunicationsLtd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 4.1% it's much better.

In the above chart we have measured T&S CommunicationsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for T&S CommunicationsLtd .

What Can We Tell From T&S CommunicationsLtd's ROCE Trend?

There hasn't been much to report for T&S CommunicationsLtd's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect T&S CommunicationsLtd to be a multi-bagger going forward.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 21% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 21% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On T&S CommunicationsLtd's ROCE

In a nutshell, T&S CommunicationsLtd has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 207% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

T&S CommunicationsLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While T&S CommunicationsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.