Stock Analysis

Some Investors May Be Worried About TELUS' (TSE:T) Returns On Capital

  •  Updated
TSX:T
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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think TELUS (TSE:T) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for TELUS:

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

0.072 = CA$2.9b ÷ (CA$49b - CA$8.4b) (Based on the trailing twelve months to June 2022).

So, TELUS has an ROCE of 7.2%. On its own, that's a low figure but it's around the 8.3% average generated by the Telecom industry.

See our latest analysis for TELUS

roce
TSX:T Return on Capital Employed October 2nd 2022

In the above chart we have measured TELUS' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From TELUS' ROCE Trend?

In terms of TELUS' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. 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 TELUS' ROCE

Bringing it all together, while we're somewhat encouraged by TELUS' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 53% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 4 warning signs we've spotted with TELUS (including 1 which makes us a bit uncomfortable) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether TELUS is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About TSX:T

TELUS

TELUS Corporation, together with its subsidiaries, provides a range of telecommunications and information technology products and services in Canada.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth3
Past Performance5
Financial Health2
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Solid track record with moderate growth potential.