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Should We Be Excited About The Trends Of Returns At StarTek (NYSE:SRT)?

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There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at StarTek (NYSE:SRT) and its ROCE trend, we weren't exactly thrilled.

What is 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. To calculate this metric for StarTek, this is the formula:

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

0.04 = US$18m ÷ (US$619m - US$172m) (Based on the trailing twelve months to June 2020).

Therefore, StarTek has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 10%.

Check out our latest analysis for StarTek

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Above you can see how the current ROCE for StarTek 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 report for StarTek.

So How Is StarTek's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 21% four years ago, while the business's capital employed increased by 853%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence StarTek might not have received a full period of earnings contribution from it.

On a related note, StarTek has decreased its current liabilities to 28% of total assets. Considering it used to be 90%, that's a huge drop in that ratio and it would explain the decline in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On StarTek's ROCE

Bringing it all together, while we're somewhat encouraged by StarTek's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last year. Therefore based on the analysis done in this article, we don't think StarTek has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing StarTek that you might find interesting.

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

This article by Simply Wall St is general in nature. 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.