Charter Communications (NASDAQ:CHTR) Might Have The Makings Of A Multi-Bagger

By
Simply Wall St
Published
July 07, 2021
NasdaqGS:CHTR
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Charter Communications' (NASDAQ:CHTR) returns on capital, so let's have a look.

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. The formula for this calculation on Charter Communications is:

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

0.067 = US$9.0b ÷ (US$143b - US$9.9b) (Based on the trailing twelve months to March 2021).

Thus, Charter Communications has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.5%.

View our latest analysis for Charter Communications

roce
NasdaqGS:CHTR Return on Capital Employed July 7th 2021

In the above chart we have measured Charter Communications' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Charter Communications here for free.

What Can We Tell From Charter Communications' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 236%. So we're very much inspired by what we're seeing at Charter Communications thanks to its ability to profitably reinvest capital.

Our Take On Charter Communications' ROCE

In summary, it's great to see that Charter Communications can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 206% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Charter Communications we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Charter Communications 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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This article by Simply Wall St is general in nature. 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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