Transcat (NASDAQ:TRNS) Might Be Having Difficulty Using Its Capital Effectively

July 13, 2024

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Transcat (NASDAQ:TRNS), we don't think it's current trends fit the mold of a multi-bagger.

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 Transcat is:

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

0.085 = US$21m ÷ (US$288m - US$33m) (Based on the trailing twelve months to March 2024).

Thus, Transcat has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.

Check out our latest analysis for Transcat

Above you can see how the current ROCE for Transcat 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 analyst report for Transcat .

What Does the ROCE Trend For Transcat Tell Us?

We weren't thrilled with the trend because Transcat's ROCE has reduced by 31% over the last five years, while the business employed 206% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Transcat's earnings and if they change as a result from the capital raise.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Transcat is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 438% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Transcat, we've discovered 2 warning signs that you should be aware of.

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

Valuation is complex, but we're here to simplify it.

Discover if Transcat might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.

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