Stock Analysis

Should You Be Impressed By Crest Nicholson Holdings' (LON:CRST) Returns on Capital?

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LSE:CRST
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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. However, after briefly looking over the numbers, we don't think Crest Nicholson Holdings (LON:CRST) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Crest Nicholson Holdings is:

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

0.059 = UK£76m ÷ (UK£1.7b - UK£353m) (Based on the trailing twelve months to April 2020).

Thus, Crest Nicholson Holdings has an ROCE of 5.9%. On its own, that's a low figure but it's around the 6.7% average generated by the Consumer Durables industry.

See our latest analysis for Crest Nicholson Holdings

roce
LSE:CRST Return on Capital Employed December 16th 2020

Above you can see how the current ROCE for Crest Nicholson Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Crest Nicholson Holdings.

The Trend Of ROCE

When we looked at the ROCE trend at Crest Nicholson Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 18% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Crest Nicholson Holdings' diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 28% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Crest Nicholson Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Crest Nicholson 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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