If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at TransUnion (NYSE:TRU), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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 TransUnion is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$653m ÷ (US$11b - US$911m) (Based on the trailing twelve months to September 2023).
Thus, TransUnion has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.
View our latest analysis for TransUnion
Above you can see how the current ROCE for TransUnion compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TransUnion here for free.
What Does the ROCE Trend For TransUnion Tell Us?
In terms of TransUnion's historical ROCE trend, it doesn't exactly demand attention. The company has employed 54% more capital in the last five years, and the returns on that capital have remained stable at 6.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From TransUnion's ROCE
Long story short, while TransUnion has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
TransUnion does have some risks though, and we've spotted 1 warning sign for TransUnion that you might be interested in.
While TransUnion isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts 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 does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.