Berkeley Group Holdings (LON:BKG) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Berkeley Group Holdings (LON:BKG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Berkeley Group Holdings is:

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

0.097 = UK£471m ÷ (UK£6.7b - UK£1.9b) (Based on the trailing twelve months to October 2022).

Thus, Berkeley Group Holdings has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.

Check out our latest analysis for Berkeley Group Holdings

Above you can see how the current ROCE for Berkeley Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Berkeley Group Holdings here for free.

What Does the ROCE Trend For Berkeley Group Holdings Tell Us?

On the surface, the trend of ROCE at Berkeley Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 31% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Berkeley Group Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 17% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Berkeley Group Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

While Berkeley Group Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.