Today we are going to look at TransUnion (NYSE:TRU) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for TransUnion:
0.091 = US$585m ÷ (US$7.0b - US$628m) (Based on the trailing twelve months to September 2019.)
So, TransUnion has an ROCE of 9.1%.
Does TransUnion Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see TransUnion's ROCE is around the 11% average reported by the Professional Services industry. Aside from the industry comparison, TransUnion's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
In our analysis, TransUnion's ROCE appears to be 9.1%, compared to 3 years ago, when its ROCE was 6.5%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how TransUnion's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do TransUnion's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
TransUnion has total assets of US$7.0b and current liabilities of US$628m. Therefore its current liabilities are equivalent to approximately 8.9% of its total assets. With low levels of current liabilities, at least TransUnion's mediocre ROCE is not unduly boosted.
Our Take On TransUnion's ROCE
TransUnion looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than TransUnion. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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