If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Deutsche Telekom (ETR:DTE), we don't think it's current trends fit the mold of a multi-bagger.
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)
0.051 = €13b ÷ (€302b - €40b) (Based on the trailing twelve months to June 2022).
So, Deutsche Telekom has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.1%.
Above you can see how the current ROCE for Deutsche Telekom compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Deutsche Telekom here for free.
What Can We Tell From Deutsche Telekom's ROCE Trend?
When we looked at the ROCE trend at Deutsche Telekom, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.6% 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'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 Deutsche Telekom's ROCE
In summary, Deutsche Telekom is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Deutsche Telekom (of which 1 is a bit concerning!) that 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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Deutsche Telekom AG, together with its subsidiaries, provides integrated telecommunication services.
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Undervalued with proven track record.