M/I Homes (NYSE:MHO) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in M/I Homes' (NYSE:MHO) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on M/I Homes is:

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

0.17 = US$615m ÷ (US$4.2b - US$497m) (Based on the trailing twelve months to March 2024).

Therefore, M/I Homes has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 15%.

See our latest analysis for M/I Homes

Above you can see how the current ROCE for M/I Homes compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for M/I Homes .

What Can We Tell From M/I Homes' ROCE Trend?

The trends we've noticed at M/I Homes are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 107% more capital is being employed now too. So we're very much inspired by what we're seeing at M/I Homes thanks to its ability to profitably reinvest capital.

Our Take On M/I Homes' 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 M/I Homes has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

While M/I Homes isn't earning the highest return, check out this free list of companies that are 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com