If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So, when we ran our eye over TE Connectivity’s (NYSE:TEL) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for TE Connectivity:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = US$2.8b ÷ (US$21b – US$4.3b) (Based on the trailing twelve months to December 2021).
So, TE Connectivity has an ROCE of 16%. On its own, that’s a standard return, however it’s much better than the 10% generated by the Electronic industry.
Check out our latest analysis for TE Connectivity
Above you can see how the current ROCE for TE Connectivity 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 TE Connectivity.
What Can We Tell From TE Connectivity’s ROCE Trend?
The trend of ROCE doesn’t stand out much, but returns on a whole are decent. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that TE Connectivity has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
To sum it up, TE Connectivity has simply been reinvesting capital steadily, at those decent rates of return. Therefore it’s no surprise that shareholders have earned a respectable 96% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
While TE Connectivity doesn’t shine too bright in this respect, it’s still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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