Why BT Group (LON:BT.A) Lacks the Fundamentals to Be a Multi-Bagger

In the world of investing, multi-bagger stocks-those that deliver exponential returns over time-rarely emerge without robust fundamentals. One critical metric to evaluate such potential is Return on Capital Employed (ROCE), which measures a company's efficiency in generating profits from its capital. For BT Group (LON:BT.A), a telecommunications giant, the data paints a sobering picture: its ROCE has languished below industry benchmarks for years, and its long-term compounding potential remains constrained by structural inefficiencies and capital-intensive strategies.

A ROCE That Fails to Impress

BT Group's ROCE has averaged 7.5% over the past five years, with recent figures hovering between 7.2% and 8.5%. This underperformance becomes stark when compared to the 10% industry average for the telecom sector according to Simply Wall St. While stability might suggest reliability, it also signals a lack of innovation in capital utilization. For a company to compound value meaningfully, ROCE must consistently exceed its cost of capital and industry peers. BT's inability to do so raises questions about its capacity to generate above-market returns for shareholders.

The stagnation in ROCE is further compounded by the company's capital allocation decisions. Despite aggressive investments in 5G and fiber infrastructure-such as its £2.4 billion capital expenditure in H1 2025- BT's returns have not improved commensurately. This disconnect highlights a critical issue: capital is being deployed, but not effectively. Analysts at Exane BNP have downgraded BT to "underperform," citing sector uncertainty and valuation concerns.

Capital-Intensive Growth vs. Profitability

The telecom sector is undergoing a strategic shift toward capital efficiency and profitability, with companies prioritizing cost-cutting and high-impact M&A. BT, however, remains tethered to capital-intensive growth. Its 20.3 million premises passed for full-fiber broadband as of H1 2025 is a testament to its ambition, but such scale comes at a cost. The company's reinvestment rate-while robust in absolute terms-fails to translate into superior ROCE. For instance, BT's enterprise value-to-sales ratio of 2.04× lags behind the peer average of 4.55×, indicating weaker revenue generation relative to its peers.

This dynamic is exacerbated by regulatory and competitive pressures. BT's push for 99% 5G+ coverage by 2030 requires sustained reinvestment, yet the company's adjusted EBITDA remained flat at £4.1 billion in H1 2025/26 according to Oliver Wyman. Meanwhile, peers like Airtel Africa and Helios Towers are achieving ROCEs of 14.31% and 207.34%, respectively according to Wise Sheets, underscoring BT's relative inefficiency.

Industry Trends and the Path to Compounding

The telecom sector's broader trajectory offers a stark contrast. With global telecom spending projected to reach $1.375 trillion in 2025 according to Deloitte, companies are leveraging AI-driven automation, 5G infrastructure, and M&A to boost returns. For example, Deloitte notes that telcos are increasingly monetizing existing assets while optimizing CAPEX to maximize profitability according to IDC. BT, however, has not demonstrated a comparable pivot. Its focus on network expansion-while necessary for market share-has not been paired with operational innovations that could elevate ROCE.

Moreover, the sector's shift toward larger, high-impact M&A deals has allowed peers to consolidate capabilities and drive value. BT, by contrast, has not capitalized on such opportunities, leaving it vulnerable to margin compression and regulatory headwinds.

Conclusion: A Missed Opportunity for Compounding

For a stock to become a multi-bagger, it must exhibit sustainable ROCE growth, disciplined capital allocation, and strategic reinvestment. BT Group, despite its infrastructure ambitions, falls short on all counts. Its ROCE remains subpar, its reinvestment strategies are capital-intensive without commensurate returns, and its strategic initiatives lag behind industry peers. While the company's 5G and fiber rollout may secure market share, these efforts alone cannot offset the lack of compounding potential.

Investors seeking exponential returns would do well to look elsewhere in the telecom sector. For BT, the path to becoming a multi-bagger requires not just more capital, but a fundamental rethinking of how that capital is deployed.