Comstock Holding Companies (NASDAQ:CHCI): Are Investors Overlooking Returns On Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Comstock Holding Companies (NASDAQ:CHCI) we really liked what we saw.

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

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 Comstock Holding Companies is:

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

0.23 = US$3.6m ÷ (US$18m - US$2.3m) (Based on the trailing twelve months to September 2020).

Thus, Comstock Holding Companies has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.

See our latest analysis for Comstock Holding Companies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Comstock Holding Companies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Comstock Holding Companies, check out these free graphs here.

So How Is Comstock Holding Companies' ROCE Trending?

It's great to see that Comstock Holding Companies has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 23% on their capital employed. In regards to capital employed, Comstock Holding Companies is using 60% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

One more thing to note, Comstock Holding Companies has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Comstock Holding Companies' ROCE

In a nutshell, we're pleased to see that Comstock Holding Companies has been able to generate higher returns from less capital. Since the stock has returned a staggering 235% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Comstock Holding Companies can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 3 warning signs for Comstock Holding Companies you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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