Investors Met With Slowing Returns on Capital At Bezeq The Israel Telecommunication (TLV:BEZQ)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Bezeq The Israel Telecommunication (TLV:BEZQ) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Bezeq The Israel Telecommunication:

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

0.17 = ₪1.8b ÷ (₪14b - ₪3.3b) (Based on the trailing twelve months to June 2021).

Therefore, Bezeq The Israel Telecommunication has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 9.9% it's much better.

Check out our latest analysis for Bezeq The Israel Telecommunication

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'd like to see what analysts are forecasting going forward, you should check out our free report for Bezeq The Israel Telecommunication.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Bezeq The Israel Telecommunication's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Bezeq The Israel Telecommunication in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that Bezeq The Israel Telecommunication has been paying out a decent 55% 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 Key Takeaway

In a nutshell, Bezeq The Israel Telecommunication has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 33% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Bezeq The Israel Telecommunication has the makings of a multi-bagger.

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

While Bezeq The Israel Telecommunication 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.

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.

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