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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Thomson Reuters' (TSE:TRI) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Thomson Reuters:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$1.9b ÷ (US$18b - US$3.4b) (Based on the trailing twelve months to December 2024).
Therefore, Thomson Reuters has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 16%.
Check out our latest analysis for Thomson Reuters
In the above chart we have measured Thomson Reuters' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Thomson Reuters .
What Can We Tell From Thomson Reuters' ROCE Trend?
Thomson Reuters is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 104% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Thomson Reuters' ROCE
As discussed above, Thomson Reuters appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 158% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.