Returns On Capital Are Showing Encouraging Signs At Telefónica Deutschland Holding (ETR:O2D)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Telefónica Deutschland Holding (ETR:O2D) looks quite promising in regards to its trends of return on capital.

What Is 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 Telefónica Deutschland Holding is:

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

0.012 = €141m ÷ (€16b - €4.1b) (Based on the trailing twelve months to September 2022).

Thus, Telefónica Deutschland Holding has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 5.2%.

View our latest analysis for Telefónica Deutschland Holding

Above you can see how the current ROCE for Telefónica Deutschland Holding 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.

How Are Returns Trending?

We're delighted to see that Telefónica Deutschland Holding is reaping rewards from its investments and has now broken into profitability. The company now earns 1.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Telefónica Deutschland Holding has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line On Telefónica Deutschland Holding's ROCE

To sum it up, Telefónica Deutschland Holding is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Telefónica Deutschland Holding does come with some risks, and we've found 2 warning signs that 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.