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Here's What's Concerning About Nera Telecommunications' (SGX:N01) Returns On Capital

editorial-team@simplywallst.com (Simply Wall St)
·3 min read

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Nera Telecommunications (SGX:N01), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on Nera Telecommunications is:

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

0.017 = S$886k ÷ (S$127m - S$75m) (Based on the trailing twelve months to December 2023).

Thus, Nera Telecommunications has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Communications industry average of 5.1%.

View our latest analysis for Nera Telecommunications

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Nera Telecommunications' past further, check out this free graph covering Nera Telecommunications' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Nera Telecommunications' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 17% five years ago but has since fallen to 1.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 23% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a separate but related note, it's important to know that Nera Telecommunications has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Nera Telecommunications' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 68% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 4 warning signs for Nera Telecommunications (1 doesn't sit too well with us) you should be aware of.

While Nera Telecommunications 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.

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.

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