Investors Will Want Neinor Homes' (BME:HOME) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. With that in mind, we've noticed some promising trends at Neinor Homes (BME:HOME) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

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 Neinor Homes, this is the formula:

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

0.10 = €126m ÷ (€1.8b - €557m) (Based on the trailing twelve months to September 2022).

Thus, Neinor Homes has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

View our latest analysis for Neinor Homes

Above you can see how the current ROCE for Neinor Homes compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Neinor Homes' ROCE Trend?

We're delighted to see that Neinor Homes is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 10% on its capital. Not only that, but the company is utilizing 67% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Neinor Homes' ROCE

In summary, it's great to see that Neinor Homes has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 42% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Neinor Homes does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.