Telefónica Deutschland Holding (ETR:O2D) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Telefónica Deutschland Holding (ETR:O2D) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.008 = €94m ÷ (€16b - €4.1b) (Based on the trailing twelve months to June 2022).

So, Telefónica Deutschland Holding has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Telecom industry average of 5.1%.

Our analysis indicates that O2D is potentially undervalued!

In the above chart we have measured Telefónica Deutschland Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Telefónica Deutschland Holding.

What The Trend Of ROCE Can Tell Us

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 0.8% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. 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

In summary, we're delighted to see that Telefónica Deutschland Holding has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 35% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

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.