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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Telecom Plus (LON:TEP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Telecom Plus, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = UK£52m ÷ (UK£466m - UK£159m) (Based on the trailing twelve months to March 2022).
Thus, Telecom Plus has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Integrated Utilities industry average of 6.1% it's much better.
In the above chart we have measured Telecom Plus' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Telecom Plus.
The Trend Of ROCE
Things have been pretty stable at Telecom Plus, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Telecom Plus doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Telecom Plus has been paying out 85% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.
What We Can Learn From Telecom Plus' ROCE
We can conclude that in regards to Telecom Plus' returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 98% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Like most companies, Telecom Plus does come with some risks, and we've found 1 warning sign that you should be aware of.
While Telecom Plus 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.
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