Taylor Wimpey (LON:TW.) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Taylor Wimpey (LON:TW.) 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. To calculate this metric for Taylor Wimpey, this is the formula:

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

0.081 = UK£412m ÷ (UK£6.3b - UK£1.2b) (Based on the trailing twelve months to June 2024).

Thus, Taylor Wimpey has an ROCE of 8.1%. On its own, that's a low figure but it's around the 8.7% average generated by the Consumer Durables industry.

Check out our latest analysis for Taylor Wimpey

Above you can see how the current ROCE for Taylor Wimpey 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 analyst report for Taylor Wimpey .

What Can We Tell From Taylor Wimpey's ROCE Trend?

When we looked at the ROCE trend at Taylor Wimpey, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 8.1%. 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.

Our Take On Taylor Wimpey's ROCE

In summary, we're somewhat concerned by Taylor Wimpey's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Taylor Wimpey, we've spotted 3 warning signs, and 1 of them can't be ignored.

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.