Dun & Bradstreet Holdings (NYSE:DNB) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Dun & Bradstreet Holdings (NYSE:DNB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Dun & Bradstreet Holdings is:

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

0.024 = US$197m ÷ (US$9.3b - US$999m) (Based on the trailing twelve months to March 2023).

Thus, Dun & Bradstreet Holdings has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.

View our latest analysis for Dun & Bradstreet Holdings

In the above chart we have measured Dun & Bradstreet Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dun & Bradstreet Holdings here for free.

What Can We Tell From Dun & Bradstreet Holdings' ROCE Trend?

In terms of Dun & Bradstreet Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 44%, but since then they've fallen to 2.4%. However it looks like Dun & Bradstreet Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Dun & Bradstreet Holdings has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Dun & Bradstreet Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 51% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Dun & Bradstreet Holdings has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Dun & Bradstreet Holdings (1 is significant) you should be aware of.

While Dun & Bradstreet Holdings 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.