Trainline (LON:TRN) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Trainline (LON:TRN) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Trainline:

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

0.037 = UK£15m ÷ (UK£648m - UK£240m) (Based on the trailing twelve months to August 2022).

Therefore, Trainline has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.5%.

Check out our latest analysis for Trainline

Above you can see how the current ROCE for Trainline compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Trainline Tell Us?

We're delighted to see that Trainline is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 3.7% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 27%. Trainline could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 37% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Trainline's ROCE

In a nutshell, we're pleased to see that Trainline has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 28% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 1 warning sign with Trainline and understanding this should be part of your investment process.

While Trainline may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.