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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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, when we ran our eye over NVR’s (NYSE:NVR) trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for NVR, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.40 = US$1.9b ÷ (US$5.7b – US$942m) (Based on the trailing twelve months to March 2022).
Therefore, NVR has an ROCE of 40%. That’s a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
See our latest analysis for NVR
In the above chart we have measured NVR’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering NVR here for free.
What Can We Tell From NVR’s ROCE Trend?
NVR deserves to be commended in regards to it’s returns. The company has employed 122% more capital in the last five years, and the returns on that capital have remained stable at 40%. Now considering ROCE is an attractive 40%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You’ll see this when looking at well operated businesses or favorable business models.
The Bottom Line On NVR’s ROCE
NVR has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. Therefore it’s no surprise that shareholders have earned a respectable 68% return if they held over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
NVR does have some risks though, and we’ve spotted 1 warning sign for NVR that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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