Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. 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.
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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)
0.074 = US$733m ÷ (US$11b – US$1.1b) (Based on the trailing twelve months to December 2024).
Thus, 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
In the above chart we have measured TransUnion’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering TransUnion for free.
There are better returns on capital out there than what we’re seeing at TransUnion. Over the past five years, ROCE has remained relatively flat at around 7.4% and the business has deployed 52% more capital into its operations. 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.
Long story short, while TransUnion has been reinvesting its capital, the returns that it’s generating haven’t increased. And investors may be recognizing these trends since the stock has only returned a total of 1.8% to shareholders over the last five years. Therefore, if you’re looking for a multi-bagger, we’d propose looking at other options.
One more thing: We’ve identified 2 warning signs with TransUnion (at least 1 which shouldn’t be ignored) , and understanding them would certainly be useful.