If we are to find a title that could multiply over the long term, what are the underlying trends that we need to look for? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. However, after investigation TPG Telecom (ASX: TPG), we don’t think the current trends fit the mold of a multi-bagger.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for TPG Telecom:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.019 = A $ 344 million ÷ (A $ 19 billion – A $ 1.3 billion) (Based on the last twelve months up to June 2021).
So, TPG Telecom posted a ROCE of 1.9%. In absolute terms, this is a low return and it is also below the telecom industry average of 5.9%.
See our latest review for TPG Telecom
In the graph above, we measured TPG Telecom’s past ROCE against its past performance, but the future is arguably more important. If you want, you can view TPG Telecom’s analyst forecasts here for free.
What does TPG Telecom’s ROCE trend tell us?
Returns on capital have not changed much for TPG Telecom in recent years. The company has steadily gained 1.9% over the past five years, and the capital employed within the company has increased by 282% during this period. Since the company has increased the amount of capital used, it seems that the investments that have been made are simply not providing a high return on capital.
In addition, TPG Telecom has been successful in reducing its current liabilities to 6.7% of total assets over the past five years. This can eliminate some of the risks inherent in operations because the company has fewer unpaid obligations to its suppliers and / or short-term creditors than before.
TPG Telecom’s ROCE result
In short, while TPG Telecom has reinvested its capital, the returns it generates have not increased. Additionally, the total shareholder return for the past year has been stable, which is not too surprising. Overall, we’re not too inspired by the underlying trends and think there might be a better chance of finding a multi-bagger elsewhere.
While TPG Telecom doesn’t shine too much in this regard, it’s still worth seeing if the company is trading at attractive prices. You can find out with our FREE estimate of intrinsic value on our platform.
Although TPG Telecom doesn’t get the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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