What Can The Trends At United States Cellular (NYSE:USM) Tell Us About Their Returns?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at United States Cellular (NYSE:USM) so let’s look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for United States Cellular, this is the formula:

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

0.018 = US$144m ÷ (US$8.5b – US$697m) (Based on the trailing twelve months to June 2020).

So, United States Cellular has an ROCE of 1.8%. In absolute terms, that’s a low return and it also under-performs the Wireless Telecom industry average of 3.7%.

View our latest analysis for United States Cellular

roce
NYSE:USM Return on Capital Employed August 26th 2020

Above you can see how the current ROCE for United States Cellular 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 United States Cellular.

So How Is United States Cellular’s ROCE Trending?

The fact that United States Cellular is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it’s earning 1.8% which is a sight for sore eyes. In addition to that, United States Cellular is employing 35% more capital than previously which is expected of a company that’s trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On United States Cellular’s ROCE

Long story short, we’re delighted to see that United States Cellular’s reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.8% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for United States Cellular (of which 1 makes us a bit uncomfortable!) that you should know about.

While United States Cellular 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. 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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