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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at freenet (ETR:FNTN) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on freenet is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = €379m ÷ (€3.3b - €1.1b) (Based on the trailing twelve months to December 2024).
Therefore, freenet has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Wireless Telecom industry average of 8.4% it's much better.
See our latest analysis for freenet
Above you can see how the current ROCE for freenet 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 freenet for free.
What The Trend Of ROCE Can Tell Us
freenet has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 126%. The company is now earning €0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line On freenet's ROCE
In the end, freenet has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 177% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know about the risks facing freenet, we've discovered 1 warning sign that you should be aware of.