If you’re looking for a multi-bagger, there’s a few things to 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at BT Group (LON:BT.A), it didn’t seem to tick all of these boxes.
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. Analysts use this formula to calculate it for BT Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.078 = UK£3.3b ÷ (UK£53b – UK£10b) (Based on the trailing twelve months to September 2023).
Thus, BT Group has an ROCE of 7.8%. On its own, that’s a low figure but it’s around the 8.7% average generated by the Telecom industry.
Check out our latest analysis for BT Group
In the above chart we have measured BT Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For BT Group Tell Us?
On the surface, the trend of ROCE at BT Group doesn’t inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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
In summary, BT Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 40% in the last five years. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
One more thing: We’ve identified 3 warning signs with BT Group (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
While BT Group 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. 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.
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