Investors Could Be Concerned With Dun & Bradstreet Holdings' (NYSE:DNB) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Dun & Bradstreet Holdings (NYSE:DNB), it didn't seem to tick all of these boxes.

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. 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)

0.012 = US$103m ÷ (US$9.7b - US$920m) (Based on the trailing twelve months to September 2021).

Therefore, Dun & Bradstreet Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 11%.

View 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, 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?

On the surface, the trend of ROCE at Dun & Bradstreet Holdings doesn't inspire confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 1.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Dun & Bradstreet Holdings has done well to pay down its current liabilities to 9.4% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On Dun & Bradstreet Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Dun & Bradstreet Holdings. However, despite the promising trends, the stock has fallen 24% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Dun & Bradstreet Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Dun & Bradstreet Holdings 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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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.