Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in TransDigm Group's (NYSE:TDG) 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. To calculate this metric for TransDigm Group, this is the formula:

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

0.17 = US$3.5b ÷ (US$22b - US$1.9b) (Based on the trailing twelve months to June 2024).

Therefore, TransDigm Group has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 11% it's much better.

Above you can see how the current ROCE for TransDigm Group 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 TransDigm Group .

So How Is TransDigm Group's ROCE Trending?

The trends we've noticed at TransDigm Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 22%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On TransDigm Group's ROCE

All in all, it's terrific to see that TransDigm Group is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

TransDigm Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

While TransDigm Group 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.