What underlying trends should we watch out for if we want to uncover a stock that could grow over time? First and foremost, we’ll be looking for evidence of a rising return on capital employed (ROCE), as well as an expanding base of capital employed. This essentially means that a business has lucrative initiatives that it can keep reinvesting in, which is a characteristic of a compounding machine. Having said that, at first glance, we aren’t overjoyed with Verizon Communications’ (NYSE:VZ) returns trajectory, but let’s take a closer look.
If you’re still unclear, let me just make it clear that ROCE is a metric for assessing how much pre-tax income (in percentage terms) a corporation earns on the capital invested in its enterprise. It is calculated by analysts for Verizon Communications using the following formula:
Although we compared Verizon Communications’ past ROCE to its past performance in the above figure, one could argue that the future is more crucial. If this interests you, you can examine the analyst forecasts for the company in our free report.
The trend isn’t great when compared to Verizon Communications’ prior ROCE changes. More specifically, during the past five years, ROCE has decreased from 13%. However, the corporation has been using more capital recently without a corresponding increase in sales, which may indicate that these expenditures are longer-term strategies. Before the corporation starts to notice any improvement in earnings from these investments, it can take some time.
As a result, while Verizon Communications is continuing to invest in the company, returns have been declining. Investors would not be too enthusiastic about this pattern improving either, given that the stock has down 25% over the previous five years. Overall, we don’t see the underlying patterns to be particularly exciting, and we believe there may be better opportunities to locate a multi-bagger elsewhere.
The two red flags that our study uncovered may be of interest to you if you wish to look into Verizon Communications further.