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If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Meritage Homes (NYSE:MTH) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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 Meritage Homes:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = US$554m ÷ (US$3.9b – US$466m) (Based on the trailing twelve months to December 2020).
Therefore, Meritage Homes has an ROCE of 16%. That’s a relatively normal return on capital, and it’s around the 14% generated by the Consumer Durables industry.
Check out our latest analysis for Meritage Homes
Above you can see how the current ROCE for Meritage Homes compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what’s happening at Meritage Homes. The data shows that returns on capital have increased substantially over the last five years to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 41% more capital is being employed now too. So we’re very much inspired by what we’re seeing at Meritage Homes thanks to its ability to profitably reinvest capital.
In Conclusion…
All in all, it’s terrific to see that Meritage Homes 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.
One more thing, we’ve spotted 2 warning signs facing Meritage Homes that you might find interesting.
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. 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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