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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at TransUnion (NYSE:TRU) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
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 TransUnion, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = US$629m ÷ (US$12b - US$1.2b) (Based on the trailing twelve months to March 2022).
So, TransUnion has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 13%.
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.
So How Is TransUnion's ROCE Trending?
On the surface, the trend of ROCE at TransUnion doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.7% from 8.5% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On TransUnion's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for TransUnion. And the stock has followed suit returning a meaningful 84% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for TransUnion (of which 1 is potentially serious!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.