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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Swisscom (VTX:SCMN), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Swisscom, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CHF2.3b ÷ (CHF25b - CHF4.3b) (Based on the trailing twelve months to March 2023).
Thus, Swisscom has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Telecom industry.
Check out our latest analysis for Swisscom
Above you can see how the current ROCE for Swisscom compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Swisscom.
So How Is Swisscom's ROCE Trending?
Things have been pretty stable at Swisscom, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Swisscom doesn't end up being a multi-bagger in a few years time. That probably explains why Swisscom has been paying out 68% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
What We Can Learn From Swisscom's ROCE
In summary, Swisscom isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 58% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you want to know some of the risks facing Swisscom we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.