We Like These Underlying Return On Capital Trends At Tele2 (STO:TEL2 B)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Tele2's (STO:TEL2 B) returns on capital, so let's have a look.

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What Is 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. The formula for this calculation on Tele2 is:

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

0.13 = kr6.4b ÷ (kr65b - kr14b) (Based on the trailing twelve months to March 2025).

So, Tele2 has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Wireless Telecom industry.

Check out our latest analysis for Tele2

Above you can see how the current ROCE for Tele2 compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tele2 for free.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at Tele2. The data shows that returns on capital have increased by 74% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Tele2 appears to been achieving more with less, since the business is using 28% less capital to run its operation. Tele2 may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

In a nutshell, we're pleased to see that Tele2 has been able to generate higher returns from less capital. And with a respectable 66% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 2 warning signs with Tele2 and understanding these should be part of your investment process.

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.