Some Investors May Be Worried About Berkeley Group Holdings' (LON:BKG) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Berkeley Group Holdings (LON:BKG), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Berkeley Group Holdings:

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).

Therefore, 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 12%.

Check out our latest analysis for Berkeley Group Holdings

In the above chart we have measured Berkeley Group Holdings' 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.

SWOT Analysis for Berkeley Group Holdings

What Can We Tell From Berkeley Group Holdings' ROCE Trend?

When we looked at the ROCE trend at Berkeley Group Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 9.7%. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Berkeley Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Berkeley Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 11% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Berkeley Group Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

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.