U.S. markets open in 7 hours 1 minute
  • S&P Futures

    4,569.25
    +11.25 (+0.25%)
     
  • Dow Futures

    35,656.00
    +36.00 (+0.10%)
     
  • Nasdaq Futures

    15,580.50
    +84.75 (+0.55%)
     
  • Russell 2000 Futures

    2,315.60
    +5.30 (+0.23%)
     
  • Crude Oil

    83.66
    -0.10 (-0.12%)
     
  • Gold

    1,807.20
    +0.40 (+0.02%)
     
  • Silver

    24.51
    -0.08 (-0.33%)
     
  • EUR/USD

    1.1606
    -0.0008 (-0.07%)
     
  • 10-Yr Bond

    1.6350
    0.0000 (0.00%)
     
  • Vix

    15.24
    -0.19 (-1.23%)
     
  • GBP/USD

    1.3767
    -0.0002 (-0.01%)
     
  • USD/JPY

    113.9120
    +0.2130 (+0.19%)
     
  • BTC-USD

    62,416.10
    +528.76 (+0.85%)
     
  • CMC Crypto 200

    1,499.40
    +1,256.72 (+517.85%)
     
  • FTSE 100

    7,222.82
    +18.27 (+0.25%)
     
  • Nikkei 225

    29,106.01
    +505.60 (+1.77%)
     

How Did TransUnion's (NYSE:TRU) 14% ROE Fare Against The Industry?

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. To keep the lesson grounded in practicality, we'll use ROE to better understand TransUnion (NYSE:TRU).

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for TransUnion

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for TransUnion is:

14% = US$337m ÷ US$2.4b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.14.

Does TransUnion Have A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. You can see in the graphic below that TransUnion has an ROE that is fairly close to the average for the Professional Services industry (13%).

roe
roe

That's neither particularly good, nor bad. While at least the ROE is not lower than the industry, its still worth checking what role the company's debt plays as high debt levels relative to equity may also make the ROE appear high. If a company takes on too much debt, it is at higher risk of defaulting on interest payments. You can see the 2 risks we have identified for TransUnion by visiting our risks dashboard for free on our platform here.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.

TransUnion's Debt And Its 14% ROE

It's worth noting the high use of debt by TransUnion, leading to its debt to equity ratio of 1.55. There's no doubt its ROE is decent, but the very high debt the company carries is not too exciting to see. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.

Summary

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

But when a business is high quality, the market often bids it up to a price that reflects this. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So I think it may be worth checking this free report on analyst forecasts for the company.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.

This article by Simply Wall St is general in nature. 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.