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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at BCE (TSE:BCE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is 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 BCE:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CA$5.4b ÷ (CA$61b - CA$8.1b) (Based on the trailing twelve months to June 2020).
Thus, BCE 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 8.9%.
In the above chart we have a measured BCE's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for BCE.
So How Is BCE's ROCE Trending?
When we looked at the ROCE trend at BCE, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 10%. However it looks like BCE 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.
The Key Takeaway
To conclude, we've found that BCE is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 36% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One final note, you should learn about the 2 warning signs we've spotted with BCE (including 1 which is is concerning) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.