Telephone and Data Systems (NYSE:TDS) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Telephone and Data Systems (NYSE:TDS), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Telephone and Data Systems, this is the formula:

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

0.012 = US$151m ÷ (US$15b - US$1.5b) (Based on the trailing twelve months to December 2022).

Therefore, Telephone and Data Systems has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 7.2%.

View our latest analysis for Telephone and Data Systems

roce

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 here for free.

So How Is Telephone and Data Systems' ROCE Trending?

When we looked at the ROCE trend at Telephone and Data Systems, we didn't gain much confidence. To be more specific, ROCE has fallen from 1.8% 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 may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

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 in the last five years, the stock has given away 54% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 spotted 3 warning signs facing Telephone and Data Systems that you might find interesting.

While Telephone and Data Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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