Stock Analysis

United Internet (ETR:UTDI) May Have Issues Allocating Its Capital

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at United Internet (ETR:UTDI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for United Internet, this is the formula:

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

0.096 = €784m ÷ (€10b - €1.9b) (Based on the trailing twelve months to September 2022).

So, United Internet has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 5.1% generated by the Telecom industry, it's much better.

Check out the opportunities and risks within the DE Telecom industry.

XTRA:UTDI Return on Capital Employed December 5th 2022

In the above chart we have measured United Internet'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 United Internet.

The Trend Of ROCE

In terms of United Internet's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 9.6%. However it looks like United Internet 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'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.

The Bottom Line

To conclude, we've found that United Internet is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 63% in the last five years. Therefore based on the analysis done in this article, we don't think United Internet has the makings of a multi-bagger.

Like most companies, United Internet does come with some risks, and we've found 1 warning sign that you should be aware of.

While United Internet may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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Find out whether United Internet is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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