Capital Allocation Trends At Bellway (LON:BWY) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Bellway (LON:BWY) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Bellway:

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

0.13 = UK£544m ÷ (UK£5.1b - UK£1.0b) (Based on the trailing twelve months to July 2023).

So, Bellway has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 11%.

View our latest analysis for Bellway

Above you can see how the current ROCE for Bellway 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Bellway doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 13%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Bellway is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 2 warning signs for Bellway (1 can't be ignored) you should be aware of.

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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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.