Barratt Developments' (LON:BDEV) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Barratt Developments (LON:BDEV) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. The formula for this calculation on Barratt Developments is:

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

0.16 = UK£1.1b ÷ (UK£8.2b - UK£1.7b) (Based on the trailing twelve months to June 2022).

So, Barratt Developments has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 14%.

See our latest analysis for Barratt Developments

In the above chart we have measured Barratt Developments' 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 report on analyst forecasts for the company.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 32% in that time. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

To sum it up, Barratt Developments has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 16%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Barratt Developments (of which 1 is a bit concerning!) that you should know about.

While Barratt Developments 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.