D.R. Horton (NYSE:DHI) Is Very Good At Capital Allocation

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in D.R. Horton's (NYSE:DHI) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for D.R. Horton:

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

0.22 = US$6.4b ÷ (US$35b - US$5.3b) (Based on the trailing twelve months to June 2024).

Therefore, D.R. Horton has an ROCE of 22%. 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 D.R. Horton

Above you can see how the current ROCE for D.R. Horton compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering D.R. Horton for free.

The Trend Of ROCE

D.R. Horton is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 128%. So we're very much inspired by what we're seeing at D.R. Horton thanks to its ability to profitably reinvest capital.

The Bottom Line On D.R. Horton's ROCE

In summary, it's great to see that D.R. Horton can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 288% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for DHI on our platform that is definitely worth checking out.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.