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Returns At LGI Homes (NASDAQ:LGIH) Appear To Be Weighed Down


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’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That’s why when we briefly looked at LGI Homes’ (NASDAQ:LGIH) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on LGI Homes is:

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

0.17 = US$498m ÷ (US$3.1b – US$120m) (Based on the trailing twelve months to September 2022).

Thus, LGI Homes has an ROCE of 17%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 17%.

Check out our latest analysis for LGI Homes

NasdaqGS:LGIH Return on Capital Employed January 20th 2023

Above you can see how the current ROCE for LGI Homes 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 report for LGI Homes.

What Does the ROCE Trend For LGI Homes Tell Us?

The trend of ROCE doesn’t stand out much, but returns on a whole are decent. The company has employed 229% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that LGI Homes has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On LGI Homes’ ROCE

The main thing to remember is that LGI Homes has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for LGI Homes (of which 3 are significant!) that you should know about.

While LGI Homes isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we’re helping make it simple.

Find out whether LGI Homes is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.



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