There Are Reasons To Feel Uneasy About United Internet’s (ETR:UTDI) Returns On Capital

What trends should we look for? Want to identify stocks that can double in value over the long term? First, we want to see the return On the capital employed (ROCE) which is increasing and, secondly, is expanding Base of working capital. If you see this, it usually means that they are a company with a great business model and lots of profitable reinvestment opportunities. However, after looking briefly at the numbers, we don’t think so United Internet (ETR: UTDI) has the makings of a multipacker going forward, but let’s take a look at why that is.

What is return on capital employed (ROCE)?

For those who aren’t sure what ROCE is, it measures how much pre-tax profit a company can earn from the capital used in its business. Analysts use this formula to calculate it for United Internet:

Return on Capital Employed = EBIT ÷ (Total Assets – Current Liabilities)

0.096 = €784 million (€10 billion – €1.9 billion) (Based on subsequent twelve months through September 2022).

So, United Internet has a return of 9.6%. In absolute terms, that’s a low return, but it’s much better than the telecom industry average of 5.2%.

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See our latest analysis for United Internet

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In the chart above, we measure United Internet’s past ROCE against its past performance, but the future is arguably more important. If you want to know what analysts predict in the future, you should check out Free A report on the United Internet company.

What the ROCE trend can tell us

When we looked at the trend of ROCE in United Internet, we didn’t gain much confidence. Over the past five years, the return on equity has fallen to 9.6% from 17% five years ago. In the meantime, the company is using more capital, but that hasn’t moved the needle much in terms of sales over the past 12 months, so this may reflect long-term investments. It may take some time before the company starts to see any change in earnings from these investments.

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What can we learn from United Internet’s ROCE?

Putting it all together, while we somewhat encourage United Internet’s reinvestment into its own business, we recognize that returns are shrinking. And in the past five years, the stock has shed 65%, so the market doesn’t seem very optimistic about these trends reinforcing anytime soon. All in all, the inherent trends aren’t typical of multi-bag runners, so if that’s what you’re looking for, we think you might have more luck elsewhere.

One more thing: we set 2 warning signs With United Internet (at least 1 which is a bit annoying), and understanding it would definitely help.

For those who like to invest in them strong comp, Take a look at this Free List of companies with strong balance sheets and high returns on equity.

Do you have feedback on this article? Worried about the content? keep in touch directly with us. Alternatively, email the editorial team (at) simplewallst.com.

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This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst predictions 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 it does not take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by fundamental data. Note that our analysis may not include the company’s most recent price-sensitive announcements or specific materials. Wall Street simply has no position in any of the stocks mentioned.

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