What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Charter Communications (NASDAQ:CHTR) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Charter Communications is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.054 = US$7.3b ÷ (US$145b – US$9.1b) (Based on the trailing twelve months to June 2020).
Thus, Charter Communications has an ROCE of 5.4%. In absolute terms, that’s a low return and it also under-performs the Media industry average of 9.6%.
Above you can see how the current ROCE for Charter Communications 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 Charter Communications.
How Are Returns Trending?
When we looked at the ROCE trend at Charter Communications, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 5.4% from 7.2% five years ago. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Charter Communications’ ROCE
In summary, Charter Communications is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Investors must think there’s better things to come because the stock has knocked it out of the park delivering a 206% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
Charter Communications does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.
While Charter Communications isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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