Why The 28% Return On Capital At Telecom Plus (LON:TEP) Should Have Your Attention
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Telecom Plus' (LON:TEP) look very promising so lets take 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. The formula for this calculation on Telecom Plus is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = UK£96m ÷ (UK£499m - UK£156m) (Based on the trailing twelve months to September 2023).
So, Telecom Plus has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 6.3% earned by companies in a similar industry.
View our latest analysis for Telecom Plus
Above you can see how the current ROCE for Telecom Plus 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 Telecom Plus.
The Trend Of ROCE
The trends we've noticed at Telecom Plus are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 28%. Basically the business is earning more per dollar of capital invested and in addition to that, 26% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Telecom Plus' ROCE
All in all, it's terrific to see that Telecom Plus is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 34% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Telecom Plus (of which 2 shouldn't be ignored!) that you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
