Shareholders Would Enjoy A Repeat Of Meritage Homes' (NYSE:MTH) Recent Growth In Returns

By
Simply Wall St
Published
May 18, 2022
NYSE:MTH
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Meritage Homes (NYSE:MTH) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Meritage Homes, this is the formula:

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

0.25 = US$1.1b ÷ (US$5.1b - US$645m) (Based on the trailing twelve months to March 2022).

Therefore, Meritage Homes has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 16%.

See our latest analysis for Meritage Homes

roce
NYSE:MTH Return on Capital Employed May 18th 2022

In the above chart we have measured Meritage Homes' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

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 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 66%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Meritage Homes' ROCE

All in all, it's terrific to see that Meritage Homes is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

If you want to know some of the risks facing Meritage Homes we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

Meritage Homes is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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