Here's What To Make Of Experian's (LON:EXPN) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That's why when we briefly looked at Experian's (LON:EXPN) ROCE trend, we were pretty happy with what we saw.

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 Experian is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = US$1.2b ÷ (US$9.1b - US$1.8b) (Based on the trailing twelve months to September 2020).

Thus, Experian has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 13% it's much better.

Check out our latest analysis for Experian

roce

In the above chart we have measured Experian'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 report on analyst forecasts for the company.

So How Is Experian's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 26% in that time. 17% is a pretty standard return, and it provides some comfort knowing that Experian has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Experian's ROCE

The main thing to remember is that Experian has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 147% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Experian does have some risks though, and we've spotted 1 warning sign for Experian that you might be interested in.

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.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.