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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of KB Home (NYSE:KBH) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for KB Home:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = US$1.0b ÷ (US$6.7b – US$1.7b) (Based on the trailing twelve months to August 2022).
Therefore, KB Home has an ROCE of 20%. That’s a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
Check out the opportunities and risks within the US Consumer Durables industry.
In the above chart we have measured KB Home’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 KB Home.
So How Is KB Home’s ROCE Trending?
We like the trends that we’re seeing from KB Home. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 26%. So we’re very much inspired by what we’re seeing at KB Home thanks to its ability to profitably reinvest capital.
Our Take On KB Home’s ROCE
All in all, it’s terrific to see that KB Home is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 4.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
KB Home does have some risks, we noticed 4 warning signs (and 2 which don’t sit too well with us) we think you should know about.
KB Home is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Valuation is complex, but we’re helping make it simple.
Find out whether KB Home 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
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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