Stock Analysis

Here's What To Make Of Resideo Technologies' (NYSE:REZI) Returns On Capital

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NYSE:REZI
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Resideo Technologies (NYSE:REZI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Resideo Technologies, this is the formula:

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

0.086 = US$352m ÷ (US$5.6b - US$1.5b) (Based on the trailing twelve months to December 2020).

So, Resideo Technologies has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Building industry average of 14%.

See our latest analysis for Resideo Technologies

roce
NYSE:REZI Return on Capital Employed March 1st 2021

In the above chart we have measured Resideo Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Resideo Technologies.

How Are Returns Trending?

In terms of Resideo Technologies' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.6% for the last four years, and the capital employed within the business has risen 27% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Resideo Technologies has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 123% gain to shareholders who have held over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 4 warning signs with Resideo Technologies and understanding them should be part of your investment process.

While Resideo Technologies 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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What are the risks and opportunities for Resideo Technologies?

Resideo Technologies, Inc. develops, manufactures, and sells comfort, residential thermal, and security solutions to the commercial and residential end markets in the United States, Europe, and internationally.

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Rewards

  • Trading at 41% below our estimate of its fair value

  • Earnings are forecast to grow 11.03% per year

  • Earnings have grown 45% per year over the past 5 years

Risks

  • Debt is not well covered by operating cash flow

  • Large one-off items impacting financial results

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