We Like These Underlying Return On Capital Trends At Equifax (NYSE:EFX)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Equifax's (NYSE:EFX) returns on capital, so let's have a look.

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. To calculate this metric for Equifax, this is the formula:

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

0.099 = US$1.0b ÷ (US$12b - US$1.9b) (Based on the trailing twelve months to September 2024).

Thus, Equifax has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 15%.

View our latest analysis for Equifax

In the above chart we have measured Equifax's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Equifax .

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 76% more capital is being employed now too. So we're very much inspired by what we're seeing at Equifax thanks to its ability to profitably reinvest capital.

What We Can Learn From Equifax's ROCE

In summary, it's great to see that Equifax can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 82% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Equifax can keep these trends up, it could have a bright future ahead.

Equifax does have some risks though, and we've spotted 1 warning sign for Equifax that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.