What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after investigating United States Cellular (NYSE:USM), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on United States Cellular is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = US$154m ÷ (US$11b - US$901m) (Based on the trailing twelve months to December 2023).
Thus, United States Cellular has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 21%.
Above you can see how the current ROCE for United States Cellular 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 United States Cellular for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at United States Cellular doesn't inspire confidence. To be more specific, ROCE has fallen from 2.3% over the last five years. However it looks like United States Cellular 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 may take some time before the company starts to see any change in earnings from these investments.
Our Take On United States Cellular's ROCE
To conclude, we've found that United States Cellular is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think United States Cellular has the makings of a multi-bagger.
If you'd like to know about the risks facing United States Cellular, we've discovered 1 warning sign that you should be aware of.
While United States Cellular 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.