There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at freenet (ETR:FNTN) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for freenet:

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

0.15 = €344m ÷ (€3.2b - €955m) (Based on the trailing twelve months to June 2024).

Thus, freenet has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Wireless Telecom industry.

See our latest analysis for freenet

In the above chart we have measured freenet'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 analyst report for freenet .

What Can We Tell From freenet's ROCE Trend?

freenet has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 95%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, freenet appears to been achieving more with less, since the business is using 38% less capital to run its operation. freenet may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

In the end, freenet has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 85% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, freenet does come with some risks, and we've found 1 warning sign that you should be aware of.