Some Investors May Be Worried About Telephone and Data Systems' (NYSE:TDS) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 briefly looking over the numbers, we don't think Telephone and Data Systems (NYSE:TDS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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)

0.012 = US$158m ÷ (US$14b - US$1.2b) (Based on the trailing twelve months to December 2023).

Therefore, Telephone and Data Systems has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 15%.

View our latest analysis for Telephone and Data Systems

Above you can see how the current ROCE for Telephone and Data Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Telephone and Data Systems .

What The Trend Of ROCE Can Tell Us

In terms of Telephone and Data Systems' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.2% from 2.2% five years ago. However it looks like Telephone and Data Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line 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. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for Telephone and Data Systems that we think you should be aware of.

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.