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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So, when we ran our eye over Vodacom Group's (JSE:VOD) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Vodacom Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = R25b ÷ (R196b - R58b) (Based on the trailing twelve months to September 2022).
Thus, Vodacom Group has an ROCE of 18%. In absolute terms, that's a pretty standard return but compared to the Wireless Telecom industry average it falls behind.
Check out our latest analysis for Vodacom Group
Above you can see how the current ROCE for Vodacom Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Vodacom Group here for free.
SWOT Analysis for Vodacom Group
- Debt is well covered by earnings and cashflows.
- Earnings growth over the past year underperformed the Wireless Telecom industry.
- Dividend is low compared to the top 25% of dividend payers in the Wireless Telecom market.
- Expensive based on P/E ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the South African market.
- Dividends are not covered by cash flow.
- Revenue is forecast to grow slower than 20% per year.
What Does the ROCE Trend For Vodacom Group Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 34% in that time. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Vodacom Group's ROCE
The main thing to remember is that Vodacom Group has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 17% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
Vodacom Group does have some risks though, and we've spotted 3 warning signs for Vodacom Group that you might be interested in.
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.
About JSE:VOD
Vodacom Group
Operates as a connectivity, digital, and financial services company in South Africa, Egypt, and internationally.
Good value with adequate balance sheet.
