Investors Will Want Meritage Homes' (NYSE:MTH) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Meritage Homes (NYSE:MTH) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Meritage Homes is:

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

0.18 = US$995m ÷ (US$6.2b - US$655m) (Based on the trailing twelve months to September 2023).

So, Meritage Homes has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Consumer Durables industry.

View our latest analysis for Meritage Homes

Above you can see how the current ROCE for Meritage 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 report on analyst forecasts for the company.

How Are Returns Trending?

Investors would be pleased with what's happening at Meritage Homes. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 79% more capital is being employed now too. So we're very much inspired by what we're seeing at Meritage Homes thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that Meritage Homes 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 340% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Meritage Homes we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Meritage 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.