The EU’s digital economy relies on investments by the telecoms industry to keep the bloc at the forefront of digital innovation and connectivity. However, the telecoms industry has long argued that insufficient returns constrain the needed strategic infrastructure investments. This column analyses these claims by examining the operating profitability of major telecom groups in the EU. It finds that, on average, returns have exceeded the cost of capital over the past decade, although performance varies significantly across firms and investment cycles. The gap between returns and cost of capital has also remained positive, on average, when analysing in-country operations.

Recent reports by Enrico Letta (Letta 2024) and Mario Draghi (Draghi 2024) make a simple but important point: Europe’s long-term competitiveness may hinge less on gaining global market share and more on closing its persistent productivity gap and completing the single market in key sectors. Productivity growth, especially in digital technologies, and competitive markets, spurring innovation and efficient resource allocation, are central to Europe’s prosperity (Röller and Waverman 2001, Czernich et al. 2011).

The digital economy runs on data and therefore relies on affordable access to high-quality networks, a goal that the European telecom industry has largely achieved. Market opening, as well as robust regulation and competition policy combined with innovation in the global telecom equipment market have brought consumers access to high-quality services at affordable prices (Philippon 2019, European Commission 2024, Cambini et al. 2023).

Yet an enduring debate persists: is Europe’s telecom sector underperforming (Duso et al. 2024)? And if so, can it deliver the investment needed for its traditional services, like fibre and 5G? Telecom operators, in particular, have repeatedly argued that their return on capital is insufficient (Barclays 2024, Draghi 2024, ETNO 2024, Connect Europe 2025). A clearer view of the sector’s performance is therefore essential to the broader policy debate on Europe’s ability to sustain strategic infrastructure investment in network development.

Return on capital employed versus weighted average cost of capital: The classic lens on operating performance and value creation

In our analysis, we assess the performance of EU telecom operators’ capital investments by comparing return on capital employed (ROCE) with the weighted average cost of capital (WACC). This approach aligns with standard assessments used by telecom operators when arguing that their return on capital is insufficient, as discussed above. ROCE measures how efficiently companies turn capital into operating returns; WACC measures the cost of that capital. When ROCE is equal to WACC, a firm’s operating returns cover its cost of capital, which also includes the remuneration required by shareholders. When ROCE exceeds WACC, a firm’s operating returns more than cover its cost of capital (i.e. the firm creates value for investors) (Vernimmen et al. 2017).

The goodwill effect: How telecoms’ history of large M&A transactions influences the return on capital employed

Goodwill is an intangible asset category, which arises primarily as a result of mergers and acquisitions (M&A) transactions, when the acquiring company pays a purchase price which exceeds the fair market value of the net assets of the acquired company. This difference in assets’ value is recorded as an intangible asset called goodwill on the acquiring company’s balance sheet, reflecting potential future benefits such as brand value or operational synergies. This is crucial for the telecoms industry, as it was involved in decades of large M&A transactions, which have resulted in substantial goodwill on firms’ balance sheets. As goodwill increases the capital employed, it affects the ROCE calculation (see below). For this reason, following market practice (Barclays 2025a, 2025b, Bernstein 2025), we analyse ROCE both including and excluding goodwill. ROCE including goodwill captures the effectiveness of a firm’s overall capital allocation decisions, while ROCE excluding goodwill measures the operating performance of the firm’s own core investments. The latter approach thus allows us to measure more accurately the performance of core assets – such as network infrastructure and spectrum – without the distortions from accounting premiums from past acquisitions.

On an aggregate group level, EU telecom returns covered their cost of capital over the past decade, with few exceptions

Our analysis includes 14 large EU integrated operators, the same as those included in BEREC’s 2024 WACC report, covering 2014-2024. For this group-level analysis, we rely on consolidated accounts. We sourced the post-tax WACC from Bloomberg and Gormsen and Huber (2025), who measures firms’ perceived WACCs based on data from earnings calls. We then aggregated the results for each year by taking a weighted average  of each operator’s yearly WACCs.

We based the post-tax ROCE on S&P data and defined it as net operating profit after tax (NOPAT) divided by the capital employed. We then aggregated the results for each year by taking the weighted average of each operator’s yearly ROCEs.

As shown in Figure 1, between 2014 and 2024 EU telecoms’ aggregate group-level ROCE (including and excluding goodwill) was at or above the WACC, except in the period 2014-2015 and 2020-2021 for ROCE with goodwill and in 2021 for ROCE excluding goodwill. For the latter years, the ROCE decline reflects a period of heavy investment, particularly in fibre-to-the-home and 5G deployment (Connect Europe 2025), which temporarily compressed returns. In the most recent years, ROCE has regained strength, aligning with analysts’ expectations of continued improvement in telecom sector performance (Barclays 2025a, 2025b, Deloitte 2025).

Figure 1 Aggregate group-level return on capital employed (ROCE) post-tax, weighted average cost of capital (WACC) post-tax, and capital expenditure (CAPEX)

Note: To calculate the NOPAT, we adjusted the annual EBIT for S&P unusual items. To calculate the CE, we used the two-year average of total assets minus the two-year average of current liabilities; when excluding goodwill, the two-year average of goodwill is also subtracted. While additional adjustments to CE could be considered, we used the broad measure of total assets minus current liabilities, as it provides a conservative estimate of CE for the purpose of calculating ROCE. 
Source: Bloomberg et al. (2025), S&P, and CET analysis

However, the averages shown in Figure 1 mask substantial heterogeneity. Some firms consistently achieve ROCE above WACC, while others remain below. Such variation highlights the importance of a cautious interpretation of the aggregate results. Figure 2 shows this heterogeneity.

Figure 2 Aggregate group-level median, minimum and maximum of return on capital employed (ROCE) excluding goodwill post-tax minus weighted average cost of capital (WACC) post-tax

Source: Bloomberg, S&P, and CET analysis

Further, it is notable that over the past two decades, the European telecoms sector as a whole, not just the 14 companies in our sample, has maintained one of the highest dividend-payout ratios compared to other industries in Europe (Figure 3),  while simultaneously operating with high leverage (Bernstein 2025).

Figure 3 Telecoms dividend payout ratio versus other industries in Europe 

Source: Bloomberg, CET analysis.

EU in-country operations are on average still profitable despite a recent decline

In this analysis, we rely on post-tax ROCE figures from Barclays’ 2025 report, ROCE matters: Nordics lead the pack (Barclays 2025a), and on WACC figures from each firm’s annual reports. Country-level information is available for seven of the 14 groups, covering nine to 11 in-country operations (depending on the year), with some groups that are active in more than one EU country. The results (Figure 4 and Figure 5) reveal substantial variability in the performance of in-country operations in line with the aggregate results discussed above. Further, the results show a declining path in terms of median and mean ROCE-WACC difference and a rebounding in 2024, in line with the sector’s investment path and with the positive outlook for the future years.

Figure 4 Return on capital employed including goodwill minus weighted average cost of capital for EU country-level operations

Figure 5 Return on capital employed (ROCE) excluding goodwill minus weighted average cost of capital (WACC) for EU country-level operations

Source: Barclays (2025a), firms’ annual reports, and CET analysis.

Conclusions

Our analysis indicates that the EU telecom sector has, on average, earned positive returns over the past decade and maintained one of the highest dividend-payout ratios in the stock market. However, the wide dispersion in firm performance calls for caution when interpreting sector-level averages – an issue that becomes even more pronounced when examining in-country results. Whilst these preliminary findings should be viewed in the context of a broader assessment of financial indicators, claims that the EU telecommunication sector as a whole was consistently underperforming its cost of capital do not seem to be supported by this ten-year analysis of financial performance.

Source : VOXeu