Telecom Plus (LON:TEP) Is Achieving High Returns On Its Capital
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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Telecom Plus' (LON:TEP) returns on capital, so let's have a look.
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 Telecom Plus, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = UK£86m ÷ (UK£795m - UK£473m) (Based on the trailing twelve months to March 2023).
Thus, Telecom Plus has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 5.9% earned by companies in a similar industry.
Check out our latest analysis for Telecom Plus
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, you can check out the forecasts from the analysts covering Telecom Plus here for free.
So How Is Telecom Plus' ROCE Trending?
The trends we've noticed at Telecom Plus are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 27%. The amount of capital employed has increased too, by 21%. So we're very much inspired by what we're seeing at Telecom Plus thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 59% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Telecom Plus has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 83% return over the last five years. In light of that, we think it's worth looking further into this stock because if Telecom Plus can keep these trends up, it could have a bright future ahead.
Like most companies, Telecom Plus does come with some risks, and we've found 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
