Here's What To Make Of Bezeq The Israel Telecommunication's (TLV:BEZQ) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Bezeq The Israel Telecommunication (TLV:BEZQ), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.18 = ₪1.9b ÷ (₪14b - ₪3.8b) (Based on the trailing twelve months to September 2022).

So, Bezeq The Israel Telecommunication has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 11% it's much better.

Check out our latest analysis for Bezeq The Israel Telecommunication

In the above chart we have measured Bezeq The Israel Telecommunication's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Bezeq The Israel Telecommunication's ROCE Trend?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 23% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. So if this trend continues, don't be surprised if the business is smaller in a few years time.

In Conclusion...

It's a shame to see that Bezeq The Israel Telecommunication is effectively shrinking in terms of its capital base. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Bezeq The Israel Telecommunication does have some risks though, and we've spotted 1 warning sign for Bezeq The Israel Telecommunication that you might be interested in.

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.