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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of TransDigm Group (NYSE:TDG) looks great, so lets see what the trend can tell us.
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. The formula for this calculation on TransDigm Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$3.8b ÷ (US$22b - US$2.3b) (Based on the trailing twelve months to December 2024).
Therefore, TransDigm Group has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 10.0% earned by companies in a similar industry.
Check out our latest analysis for TransDigm Group
In the above chart we have measured TransDigm Group's 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 TransDigm Group .
How Are Returns Trending?
The trends we've noticed at TransDigm Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 30% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
All in all, it's terrific to see that TransDigm Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 363% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to know some of the risks facing TransDigm Group we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.