What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at United States Cellular (NYSE:USM) and its trend of ROCE, we really liked what we saw.
What Is 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. Analysts use this formula to calculate it for United States Cellular:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$187m ÷ (US$11b - US$982m) (Based on the trailing twelve months to June 2022).
Therefore, United States Cellular has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 6.1%.
Above you can see how the current ROCE for United States Cellular 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 report on analyst forecasts for the company.
So How Is United States Cellular's ROCE Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 1.9%. The amount of capital employed has increased too, by 56%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On United States Cellular's ROCE
In summary, it's great to see that United States Cellular 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. And since the stock has fallen 20% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to know some of the risks facing United States Cellular we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.
While United States Cellular isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
What are the risks and opportunities for United States Cellular?
Trading at 97.6% below our estimate of its fair value
Earnings are forecast to grow 34.55% per year
Interest payments are not well covered by earnings
Profit margins (2%) are lower than last year (3.2%)
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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.
United States Cellular
United States Cellular Corporation provides wireless telecommunications services in the United States.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Fair value with moderate growth potential.