Here's What To Make Of Verizon Communications' (NYSE:VZ) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Verizon Communications (NYSE:VZ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Verizon Communications, this is the formula:

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

0.10 = US$29b ÷ (US$316b - US$40b) (Based on the trailing twelve months to December 2020).

Therefore, Verizon Communications has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Telecom industry average of 11%.

Check out our latest analysis for Verizon Communications

In the above chart we have measured Verizon Communications' 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 Verizon Communications here for free.

What Does the ROCE Trend For Verizon Communications Tell Us?

On the surface, the trend of ROCE at Verizon Communications doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Verizon Communications' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 36% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Verizon Communications does come with some risks, and we've found 1 warning sign that you should be aware of.

While Verizon Communications 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. 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.
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