Capital Investments At NVR (NYSE:NVR) Point To A Promising Future

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. 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. That's why when we briefly looked at NVR's (NYSE:NVR) ROCE trend, we were very happy with what we saw.

What is 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 NVR is:

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

0.33 = US$1.6b ÷ (US$5.8b - US$787m) (Based on the trailing twelve months to December 2021).

Therefore, NVR has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 15%.

View our latest analysis for NVR

In the above chart we have measured NVR's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering NVR here for free.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like NVR. The company has employed 148% more capital in the last five years, and the returns on that capital have remained stable at 33%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If NVR can keep this up, we'd be very optimistic about its future.

The Bottom Line On NVR's ROCE

In summary, we're delighted to see that NVR has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 143% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation 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.