To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Telefónica Deutschland Holding (ETR:O2D) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Telefónica Deutschland Holding is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.025 = €270m ÷ (€15b - €4.3b) (Based on the trailing twelve months to September 2023).

Therefore, Telefónica Deutschland Holding has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 6.1%.

Check out our latest analysis for Telefónica Deutschland Holding

Above you can see how the current ROCE for Telefónica Deutschland Holding 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 analyst report for Telefónica Deutschland Holding .

So How Is Telefónica Deutschland Holding's ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at Telefónica Deutschland Holding promising. The figures show that over the last five years, ROCE has grown 94% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To bring it all together, Telefónica Deutschland Holding has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 19% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.