Investors Could Be Concerned With Telenet Group Holding's (EBR:TNET) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Telenet Group Holding (EBR:TNET) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Telenet Group Holding is:

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

0.14 = €594m ÷ (€5.7b - €1.5b) (Based on the trailing twelve months to December 2020).

Therefore, Telenet Group Holding has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 8.8% it's much better.

View our latest analysis for Telenet Group Holding

In the above chart we have measured Telenet Group Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Telenet Group Holding.

What Can We Tell From Telenet Group Holding's ROCE Trend?

In terms of Telenet Group Holding's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 20% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Telenet Group Holding's ROCE

Bringing it all together, while we're somewhat encouraged by Telenet Group Holding's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 11% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Telenet Group Holding does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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