If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. With that in mind, we’ve noticed some promising trends at TE connectivity (NYSE: TEL) So let’s look a little deeper.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for TE Connectivity, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.16 = US $ 2.7 billion ÷ (US $ 21 billion – US $ 4.7 billion) (Based on the last twelve months up to September 2021).
So, TE Connectivity has a ROCE of 16%. On its own, that’s a standard return, but it’s far better than the 9.9% generated by the electronics industry.
Check out our latest review for TE Connectivity
In the graph above, we measured TE Connectivity’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for TE Connectivity.
What does the ROCE trend tell us for TE connectivity?
TE Connectivity is promising given that its ROCE is on the rise and right. Looking at the data, we can see that although the capital employed in the company has remained relatively stable, the ROCE generated has increased by 32% over the past five years. So our view is that the business has increased its efficiency to generate these higher returns, while not needing to make additional investments. It’s worth digging deeper into, because while it is good that the company is more efficient, it could also mean that in the future the areas in which to invest internally for organic growth are lacking.
What we can learn from TE Connectivity’s ROCE
In summary, we are delighted to see that TE Connectivity has been able to increase efficiency and generate higher rates of return on the same amount of capital. And a remarkable 165% total return over the past five years tells us that investors expect more good things to come in the future. In light of this, we think it’s worth digging into this stock because if TE Connectivity can maintain these trends, it could have a bright future ahead of it.
While TE Connectivity looks impressive, no company is worth an endless price. The intrinsic value infographic in our free The research report shows whether TEL is currently trading at a fair price.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.