Returns On Capital At Deutsche Telekom (ETR:DTE) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Deutsche Telekom (ETR:DTE) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 1 warning sign investors should be aware of before investing in Deutsche Telekom. Read for free now.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Deutsche Telekom is:

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

0.09 = €24b ÷ (€305b - €35b) (Based on the trailing twelve months to December 2024).

So, Deutsche Telekom has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Telecom industry average of 11%.

Check out our latest analysis for Deutsche Telekom

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're interested, you can view the analysts predictions in our free analyst report for Deutsche Telekom .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Deutsche Telekom. The company has consistently earned 9.0% for the last five years, and the capital employed within the business has risen 96% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while Deutsche Telekom has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 192% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with Deutsche Telekom and understanding this should be part of your investment process.

While Deutsche Telekom isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.