Beware of Verizon Communications (NYSE: VZ) and its returns on capital
To find multi-bagger stock, what are the underlying trends we need to look for in a business? First, we would like to identify a growth return on capital employed (ROCE) and at the same time, a based capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. However, after briefly reviewing the numbers, we don’t think Verizon Communications (NYSE: VZ) has the makings of a multi-bagger in the future, but let’s see why it may be.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Verizon Communications:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.10 = US $ 32B (US $ 346B – US $ 39B) (Based on the last twelve months up to March 2021).
Therefore, Verizon Communications has a ROCE of 10%. This is a relatively normal return on capital, and it is around the 12% generated by the telecommunications industry.
Check out our latest review for Verizon Communications
Above you can see how Verizon Communications’ current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can view analyst forecasts covering Verizon Communications here for free.
What can we say about the ROCE trend of Verizon Communications?
When we looked at the ROCE trend at Verizon Communications, we didn’t gain much trust. To be more precise, ROCE has increased from 16% over the past five years. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It may take some time for the business to begin to see a change in the benefits of these investments.
The bottom line
In summary, Verizon Communications is reinvesting funds into the business for growth, but sadly, it looks like sales haven’t grown much yet. And since the stock has only returned 28% in the past five years to shareholders, you could argue that they are aware of these gloomy trends. Therefore, if you are looking for a multi-bagger, we suggest you consider other options.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 3 warning signs for Verizon Communications (1 of which does not suit us too much!) that you should know.
While Verizon Communications does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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