Hovnanian Enterprises (NYSE:HOV) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Hovnanian Enterprises (NYSE:HOV) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hovnanian Enterprises, this is the formula:

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

0.15 = US$359m ÷ (US$2.6b - US$138m) (Based on the trailing twelve months to October 2022).

Thus, Hovnanian Enterprises has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 17%.

View our latest analysis for Hovnanian Enterprises

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

So How Is Hovnanian Enterprises' ROCE Trending?

The trends we've noticed at Hovnanian Enterprises are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 51%. So we're very much inspired by what we're seeing at Hovnanian Enterprises thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 5.4%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Hovnanian Enterprises has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Hovnanian Enterprises' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hovnanian Enterprises has. Considering the stock has delivered 6.6% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a final note, we found 2 warning signs for Hovnanian Enterprises (1 is significant) you should be aware of.

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.