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Returns On Capital Signal Tricky Times Ahead For Berkeley Group Holdings (LON:BKG)


If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Berkeley Group Holdings (LON:BKG), it didn’t seem to tick all of these boxes.

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. The formula for this calculation on Berkeley Group Holdings is:

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

0.11 = UK£508m ÷ (UK£6.6b – UK£2.0b) (Based on the trailing twelve months to April 2022).

So, Berkeley Group Holdings has an ROCE of 11%. In isolation, that’s a pretty standard return but against the Consumer Durables industry average of 15%, it’s not as good.

Check out our latest analysis for Berkeley Group Holdings

LSE:BKG Return on Capital Employed November 20th 2022

In the above chart we have measured Berkeley Group Holdings’ 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 Berkeley Group Holdings.

So How Is Berkeley Group Holdings’ ROCE Trending?

When we looked at the ROCE trend at Berkeley Group Holdings, we didn’t gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Berkeley Group Holdings has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, Berkeley Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Unsurprisingly, the stock has only gained 11% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you’re hunting for a multi-bagger, we think you’d have more luck elsewhere.

Like most companies, Berkeley Group Holdings does come with some risks, and we’ve found 2 warning signs that you should be aware of.

While Berkeley Group Holdings 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.

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

Find out whether Berkeley Group Holdings 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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