Capital Allocation Trends At Neinor Homes (BME:HOME) Aren't Ideal

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Neinor Homes (BME:HOME) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

We've discovered 2 warning signs about Neinor Homes. View them for free.

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. Analysts use this formula to calculate it for Neinor Homes:

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

0.048 = €59m ÷ (€1.7b - €489m) (Based on the trailing twelve months to December 2024).

So, Neinor Homes has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.3%.

Check out our latest analysis for Neinor Homes

In the above chart we have measured Neinor Homes' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Neinor Homes .

So How Is Neinor Homes' ROCE Trending?

On the surface, the trend of ROCE at Neinor Homes doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 4.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Neinor Homes has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, we're somewhat concerned by Neinor Homes' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 172% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Neinor Homes does have some risks though, and we've spotted 2 warning signs for Neinor Homes that you might be interested in.

While Neinor 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.

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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.