There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Bezeq The Israel Telecommunication (TLV:BEZQ), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Bezeq The Israel Telecommunication, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = ₪1.9b ÷ (₪14b - ₪3.5b) (Based on the trailing twelve months to March 2021).
So, Bezeq The Israel Telecommunication has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 9.6% it's much better.
Above you can see how the current ROCE for Bezeq The Israel Telecommunication 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.
What Does the ROCE Trend For Bezeq The Israel Telecommunication Tell Us?
Things have been pretty stable at Bezeq The Israel Telecommunication, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Bezeq The Israel Telecommunication doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Bezeq The Israel Telecommunication has been paying out a decent 59% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Bottom Line On Bezeq The Israel Telecommunication's ROCE
In summary, Bezeq The Israel Telecommunication isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 42% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing, we've spotted 2 warning signs facing Bezeq The Israel Telecommunication that you might find interesting.
While Bezeq The Israel Telecommunication 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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