Yahoo Finance Transcat's (NASDAQ:TRNS) Returns Have Hit A Wall
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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Transcat (NASDAQ:TRNS) looks decent, right now, so lets see what the trend of returns can tell us.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Transcat:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$15m ÷ (US$178m - US$28m) (Based on the trailing twelve months to March 2022).
Therefore, Transcat has an ROCE of 10%. In isolation, that's a pretty standard return but against the Trade Distributors industry average of 14%, it's not as good.
View our latest analysis for Transcat
In the above chart we have measured Transcat'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 report for Transcat.
So How Is Transcat's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 107% in that time. 10% is a pretty standard return, and it provides some comfort knowing that Transcat has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Transcat's ROCE
The main thing to remember is that Transcat has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 439% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Like most companies, Transcat does come with some risks, and we've found 3 warning signs that you should be aware of.
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.
