Capital Allocation Trends At Howden Joinery Group (LON:HWDN) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Howden Joinery Group (LON:HWDN), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Howden Joinery Group is:

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

0.19 = UK£339m ÷ (UK£2.2b - UK£484m) (Based on the trailing twelve months to December 2024).

Therefore, Howden Joinery Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Trade Distributors industry.

See our latest analysis for Howden Joinery Group

Above you can see how the current ROCE for Howden Joinery Group 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 analyst report for Howden Joinery Group .

How Are Returns Trending?

On the surface, the trend of ROCE at Howden Joinery Group doesn't inspire confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 19%. However it looks like Howden Joinery Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Howden Joinery Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 66% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 2 warning signs for Howden Joinery Group that we think you should be aware of.

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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.