To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Deutsche Telekom (ETR:DTE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Deutsche Telekom:

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

0.091 = €23b ÷ (€296b - €38b) (Based on the trailing twelve months to June 2024).

Thus, Deutsche Telekom has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.0% generated by the Telecom industry, it's much better.

Check out our latest analysis for Deutsche Telekom

In the above chart we have measured Deutsche Telekom'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 Deutsche Telekom .

So How Is Deutsche Telekom's ROCE Trending?

The returns on capital haven't changed much for Deutsche Telekom in recent years. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 100% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Deutsche Telekom's ROCE

As we've seen above, Deutsche Telekom's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 108% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Deutsche Telekom and understanding it should be part of your investment process.