Here's What To Make Of Experian's (LON:EXPN) Decelerating Rates Of Return

By
Simply Wall St
Published
October 29, 2021
LSE:EXPN
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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.

Return On Capital Employed (ROCE): What is it?

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. 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$1.3b ÷ (US$10b - US$2.4b) (Based on the trailing twelve months to March 2021).

So, Experian has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Professional Services industry.

View our latest analysis for Experian

roce
LSE:EXPN Return on Capital Employed October 30th 2021

Above you can see how the current ROCE for Experian compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Experian.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 26% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Experian 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.

In Conclusion...

In the end, Experian has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 143% 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 2 warning signs for Experian that you might be interested in.

While Experian isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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