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

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Crest Nicholson Holdings (LON:CRST) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Crest Nicholson Holdings, this is the formula:

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

0.10 = UK£111m ÷ (UK£1.5b - UK£371m) (Based on the trailing twelve months to April 2023).

So, Crest Nicholson Holdings has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 12%.

View our latest analysis for Crest Nicholson Holdings

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.

What Does the ROCE Trend For Crest Nicholson Holdings Tell Us?

There is reason to be cautious about Crest Nicholson Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 18% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Crest Nicholson Holdings to turn into a multi-bagger.

The Bottom Line On Crest Nicholson Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Crest Nicholson Holdings does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.

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.