Deutsche Telekom (ETR:DTE) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Deutsche Telekom (ETR:DTE) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Deutsche Telekom:

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

0.071 = €18b ÷ (€300b - €40b) (Based on the trailing twelve months to June 2023).

Thus, Deutsche Telekom has an ROCE of 7.1%. In absolute terms, that's a low return, but it's much better than the Telecom industry average of 5.2%.

View our latest analysis for Deutsche Telekom

In the above chart we have measured Deutsche Telekom's 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 Deutsche Telekom here for free.

So How Is Deutsche Telekom's ROCE Trending?

In terms of Deutsche Telekom's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.2%, but since then they've fallen to 7.1%. 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.

Our Take On Deutsche Telekom's ROCE

To conclude, we've found that Deutsche Telekom is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 76% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 2 warning signs for Deutsche Telekom that we think you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.