Will the Promising Trends At Trainline (LON:TRN) Continue?
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Trainline's (LON:TRN) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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 Trainline is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0042 = UK£2.3m ÷ (UK£701m - UK£169m) (Based on the trailing twelve months to February 2020).
Thus, Trainline has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 8.6%.
View our latest analysis for Trainline
In the above chart we have a measured Trainline's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Trainline.
What Does the ROCE Trend For Trainline Tell Us?
We're delighted to see that Trainline is reaping rewards from its investments and has now broken into profitability. The company now earns 0.4% on its capital, because three years ago it was incurring losses. While returns have increased, the amount of capital employed by Trainline has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
Our Take On Trainline's ROCE
To bring it all together, Trainline has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 9.7% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to continue researching Trainline, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Trainline isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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