Telephone and Data Systems (NYSE:TDS) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 investigating Telephone and Data Systems (NYSE:TDS), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Telephone and Data Systems, this is the formula:

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

0.016 = US$209m ÷ (US$14b - US$1.1b) (Based on the trailing twelve months to June 2024).

So, Telephone and Data Systems has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 15%.

See 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're interested, you can view the analysts predictions in our free analyst report for Telephone and Data Systems .

What Can We Tell From Telephone and Data Systems' ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 2.1% five years ago, while the business's capital employed increased by 30%. Usually this isn't ideal, but given Telephone and Data Systems conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Telephone and Data Systems' earnings and if they change as a result from the capital raise.

What We Can Learn From 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. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 2 warning signs for Telephone and Data Systems (1 is a bit unpleasant) you should be aware of.

While Telephone and Data Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com