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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Telstra Group (ASX:TLS) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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 Telstra Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = AU$3.8b ÷ (AU$46b - AU$10b) (Based on the trailing twelve months to December 2024).
Therefore, Telstra Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Telecom industry average of 10%.
Check out our latest analysis for Telstra Group
Above you can see how the current ROCE for Telstra Group 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 Telstra Group for free.
So How Is Telstra Group's ROCE Trending?
Telstra Group is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 49% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Telstra Group's ROCE
In summary, we're delighted to see that Telstra Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 63% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.