What Do The Returns On Capital At Vodacom Group (JSE:VOD) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Vodacom Group (JSE:VOD), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Vodacom Group:

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

0.18 = R25b ÷ (R180b - R40b) (Based on the trailing twelve months to September 2020).

Therefore, Vodacom Group has an ROCE of 18%. In isolation, that's a pretty standard return but against the Wireless Telecom industry average of 26%, it's not as good.

View 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.

What Can We Tell From Vodacom Group's ROCE Trend?

When we looked at the ROCE trend at Vodacom Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 42% over the last five years. However it looks like Vodacom Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Vodacom Group has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Vodacom Group's ROCE

To conclude, we've found that Vodacom Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 8.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Vodacom Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Vodacom Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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