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 researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Crest Nicholson Holdings (LON:CRST), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.10 = UK£115m ÷ (UK£1.6b - UK£466m) (Based on the trailing twelve months to October 2021).

Therefore, Crest Nicholson Holdings has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

Check out our latest analysis for Crest Nicholson Holdings

roce
LSE:CRST Return on Capital Employed January 25th 2022

In the above chart we have measured Crest Nicholson 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.

What Can We Tell From Crest Nicholson Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at Crest Nicholson Holdings. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Crest Nicholson Holdings to turn into a multi-bagger.

What We Can Learn From Crest Nicholson Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Crest Nicholson Holdings that we think 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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Find out whether Crest Nicholson Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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