TE Connectivity (NYSE:TEL) Has More To Do To Multiply In Value Going Forward
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at TE Connectivity (NYSE:TEL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for TE Connectivity:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$2.8b ÷ (US$21b - US$4.4b) (Based on the trailing twelve months to March 2023).
So, TE Connectivity has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 13% it's much better.
View our latest analysis for TE Connectivity
In the above chart we have measured TE Connectivity's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TE Connectivity here for free.
What Does the ROCE Trend For TE Connectivity Tell Us?
Over the past five years, TE Connectivity's ROCE and capital employed have both remained mostly flat. 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 TE Connectivity to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that TE Connectivity has been paying out a decent 31% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
The Bottom Line On TE Connectivity's ROCE
In summary, TE Connectivity isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 67% 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.
One more thing to note, we've identified 1 warning sign with TE Connectivity and understanding it should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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