United States Cellular's (NYSE:USM) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, United States Cellular (NYSE:USM) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for United States Cellular, this is the formula:

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

0.012 = US$119m ÷ (US$11b - US$1.1b) (Based on the trailing twelve months to September 2022).

Thus, United States Cellular 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 6.9%.

Check out our latest analysis for United States Cellular

In the above chart we have measured United States Cellular's 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 report on analyst forecasts for the company.

What Can We Tell From United States Cellular's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 1.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 63% more capital is being employed now too. So we're very much inspired by what we're seeing at United States Cellular thanks to its ability to profitably reinvest capital.

The Bottom Line On United States Cellular's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what United States Cellular has. Given the stock has declined 48% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about United States Cellular, we've spotted 2 warning signs, and 1 of them is concerning.

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.