These Return Metrics Don’t Make Crest Nicholson Holdings (LON:CRST) Look Too Strong

If we’re looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Crest Nicholson Holdings (LON:CRST), the trends above didn’t look too great.

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. The formula for this calculation on Crest Nicholson Holdings is:

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

0.12 = UK£132m ÷ (UK£1.6b – UK£551m) (Based on the trailing twelve months to April 2022).

So, Crest Nicholson Holdings has an ROCE of 12%. That’s a relatively normal return on capital, and it’s around the 15% generated by the Consumer Durables industry.

Our analysis indicates that CRST is potentially overvalued!

Above you can see how the current ROCE for Crest Nicholson Holdings 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 Crest Nicholson Holdings.

What Does the ROCE Trend For Crest Nicholson Holdings Tell Us?

There is reason to be cautious about Crest Nicholson Holdings, given the returns are trending downwards. About five years ago, returns on capital were 20%, however they’re now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. If these trends continue, we wouldn’t expect Crest Nicholson Holdings to turn into a multi-bagger.

Our Take On Crest Nicholson Holdings’ ROCE

All in all, the lower returns from the same amount of capital employed aren’t exactly signs of a compounding machine. Long term shareholders who’ve owned the stock over the last five years have experienced a 45% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.

Crest Nicholson Holdings does have some risks though, and we’ve spotted 1 warning sign for Crest Nicholson Holdings that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.