If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Telephone and Data Systems (NYSE:TDS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Telephone and Data Systems:

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

0.016 = US$209m ÷ (US$14b - US$1.1b) (Based on the trailing twelve months to June 2024).

So, Telephone and Data Systems has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 11%.

View our latest analysis for Telephone and Data Systems

In the above chart we have measured Telephone and Data Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Telephone and Data Systems for free.

So How Is Telephone and Data Systems' ROCE Trending?

We weren't thrilled with the trend because Telephone and Data Systems' ROCE has reduced by 22% over the last five years, while the business employed 30% more capital. Usually this isn't ideal, but given Telephone and Data Systems conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Telephone and Data Systems' earnings and if they change as a result from the capital raise.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Telephone and Data Systems' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 12% 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.