Stock Analysis

Some Investors May Be Worried About Crest Nicholson Holdings' (LON:CRST) Returns On Capital

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LSE:CRST
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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Crest Nicholson Holdings (LON:CRST), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.052 = UK£57m ÷ (UK£1.5b - UK£371m) (Based on the trailing twelve months to October 2020).

Therefore, Crest Nicholson Holdings has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.2%.

See our latest analysis for Crest Nicholson Holdings

roce
LSE:CRST Return on Capital Employed April 2nd 2021

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.

How Are Returns Trending?

In terms of Crest Nicholson Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Crest Nicholson Holdings becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Crest Nicholson Holdings you'll probably want to know about.

While Crest Nicholson Holdings 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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