Investors Could Be Concerned With Telephone and Data Systems' (NYSE:TDS) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Telephone and Data Systems (NYSE:TDS), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Telephone and Data Systems:

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

0.01 = US$129m ÷ (US$14b - US$960m) (Based on the trailing twelve months to March 2025).

So, Telephone and Data Systems has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 13%.

View our latest analysis for Telephone and Data Systems

In the above chart we have measured Telephone and Data Systems' 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 Telephone and Data Systems for free.

How Are Returns Trending?

We weren't thrilled with the trend because Telephone and Data Systems' ROCE has reduced by 43% over the last five years, while the business employed 26% more capital. That being said, Telephone and Data Systems raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Telephone and Data Systems might not have received a full period of earnings contribution from it.

Our Take On Telephone and Data Systems' ROCE

Bringing it all together, while we're somewhat encouraged by Telephone and Data Systems' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 97% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Telephone and Data Systems that we think you should be aware of.

While Telephone and Data Systems 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. 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.