What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at TransUnion (NYSE:TRU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
We've discovered 2 warning signs about TransUnion. View them for free.Understanding 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. Analysts use this formula to calculate it for TransUnion:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$733m ÷ (US$11b - US$1.1b) (Based on the trailing twelve months to December 2024).
Therefore, TransUnion has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 16%.
Check out 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 for free.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at TransUnion. The company has employed 52% more capital in the last five years, and the returns on that capital have remained stable at 7.4%. 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.
The Bottom Line
As we've seen above, TransUnion's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing: We've identified 2 warning signs with TransUnion (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.