What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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.
Understanding 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. To calculate this metric for TELUS, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = CA$2.6b ÷ (CA$43b - CA$5.9b) (Based on the trailing twelve months to December 2020).
Therefore, TELUS has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Telecom industry average of 10%.
In the above chart we have measured TELUS' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TELUS here for free.
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 69%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. TELUS probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
To conclude, we've found that TELUS is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 51% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One final note, you should learn about the 5 warning signs we've spotted with TELUS (including 1 which is potentially serious) .
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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