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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Spok Holdings' (NASDAQ:SPOK) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Spok Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$21m ÷ (US$216m - US$43m) (Based on the trailing twelve months to June 2024).
Thus, Spok Holdings has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Wireless Telecom industry average of 11%.
View our latest analysis for Spok Holdings
Above you can see how the current ROCE for Spok Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Spok Holdings .
How Are Returns Trending?
We're delighted to see that Spok Holdings is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 12% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 40%. This could potentially mean that the company is selling some of its assets.
What We Can Learn From Spok Holdings' ROCE
In the end, Spok Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 89% return over the last five years. In light of that, we think it's worth looking further into this stock because if Spok Holdings can keep these trends up, it could have a bright future ahead.