Has 1&1 Drillisch (ETR:DRI) Got What It Takes To Become A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at 1&1 Drillisch's (ETR:DRI) ROCE trend, we were pretty happy with what we saw.

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 1&1 Drillisch is:

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

0.12 = €759m ÷ (€6.8b - €607m) (Based on the trailing twelve months to September 2020).

Thus, 1&1 Drillisch has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Wireless Telecom industry average of 9.9% it's much better.

See our latest analysis for 1&1 Drillisch

Above you can see how the current ROCE for 1&1 Drillisch compares to its prior returns on capital, but there's only so much you can tell from the past. 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 1&1 Drillisch's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has employed 56% more capital in the last three years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that 1&1 Drillisch has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On 1&1 Drillisch's ROCE

In the end, 1&1 Drillisch has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 69% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

1&1 Drillisch does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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