Dun & Bradstreet Holdings (NYSE:DNB) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. 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.

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 Dun & Bradstreet Holdings:

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

0.023 = US$180m ÷ (US$9.0b - US$987m) (Based on the trailing twelve months to March 2024).

Thus, Dun & Bradstreet Holdings has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 14%.

Check out our latest analysis for Dun & Bradstreet Holdings

Above you can see how the current ROCE for Dun & Bradstreet Holdings 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 analyst report for Dun & Bradstreet Holdings .

What Does the ROCE Trend For Dun & Bradstreet Holdings Tell Us?

On the surface, the trend of ROCE at Dun & Bradstreet Holdings doesn't inspire confidence. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 2.3%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Dun & Bradstreet Holdings has done well to pay down its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. And in the last three years, the stock has given away 56% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Dun & Bradstreet Holdings we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

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