We Like These Underlying Trends At Neinor Homes (BME:HOME)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Neinor Homes' (BME:HOME) returns on capital, so let's have a look.

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

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

0.10 = €91m ÷ (€1.6b - €657m) (Based on the trailing twelve months to September 2020).

Therefore, Neinor Homes has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Consumer Durables industry.

See 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'd like, you can check out the forecasts from the analysts covering Neinor Homes here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Neinor Homes is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 10% which is a sight for sore eyes. In addition to that, Neinor Homes is employing 37% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a separate but related note, it's important to know that Neinor Homes has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Neinor Homes' ROCE

To the delight of most shareholders, Neinor Homes has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 41% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for Neinor Homes you'll probably want to know about.

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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