If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over TransDigm Group's (NYSE:TDG) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for TransDigm Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$3.1b ÷ (US$21b - US$1.8b) (Based on the trailing twelve months to December 2023).
Therefore, TransDigm Group has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 9.7% it's much better.
In the above chart we have measured TransDigm Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for TransDigm Group .
The Trend Of ROCE
While the current returns on capital are decent, they haven't changed much. The company has employed 64% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that TransDigm Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
To sum it up, TransDigm Group has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 228% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you want to know some of the risks facing TransDigm Group we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.
While TransDigm Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.