Yahoo Finance Investors Will Want TransDigm Group's (NYSE:TDG) Growth In ROCE To Persist
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at TransDigm Group (NYSE:TDG) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for TransDigm Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$3.3b ÷ (US$22b - US$2.2b) (Based on the trailing twelve months to March 2024).
Therefore, TransDigm Group has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Aerospace & Defense 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're interested, you can view the analysts predictions in our free analyst report for TransDigm Group .
So How Is TransDigm Group's ROCE Trending?
Investors would be pleased with what's happening at TransDigm Group. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 20% more capital is being employed now too. So we're very much inspired by what we're seeing at TransDigm Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that TransDigm Group is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
TransDigm Group does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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