Is ecotel communication ag (ETR:E4C) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at ecotel communication ag (ETR:E4C) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for ecotel communication ag:

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

0.068 = €2.5m ÷ (€54m - €17m) (Based on the trailing twelve months to September 2020).

Thus, ecotel communication ag has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Telecom industry average of 6.0%.

See our latest analysis for ecotel communication ag

Historical performance is a great place to start when researching a stock so above you can see the gauge for ecotel communication ag's ROCE against it's prior returns. If you're interested in investigating ecotel communication ag's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at ecotel communication ag doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.8% from 18% five years ago. However it looks like ecotel communication ag might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On ecotel communication ag's ROCE

Bringing it all together, while we're somewhat encouraged by ecotel communication ag's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with ecotel communication ag (including 1 which is potentially serious) .

While ecotel communication ag 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. 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.
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