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Vodafone Group (LON:VOD) Is Doing The Right Things To Multiply Its Share Price

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  • VOD
  • VODPF

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at Vodafone Group (LON:VOD) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Vodafone Group, this is the formula:

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

0.032 = €4.1b ÷ (€155b - €29b) (Based on the trailing twelve months to March 2021).

So, Vodafone Group has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 8.9%.

View our latest analysis for Vodafone Group

roce
roce

Above you can see how the current ROCE for Vodafone Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Vodafone Group here for free.

What Does the ROCE Trend For Vodafone Group Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Vodafone Group promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 124% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

To bring it all together, Vodafone Group has done well to increase the returns it's generating from its capital employed. Given the stock has declined 34% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Vodafone Group does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Vodafone Group 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.

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 (at) simplywallst.com.