Returns On Capital Signal Tricky Times Ahead For Champion Homes (NYSE:SKY)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Champion Homes (NYSE:SKY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for Champion Homes:

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

0.12 = US$186m ÷ (US$2.0b - US$419m) (Based on the trailing twelve months to September 2024).

Thus, Champion Homes has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Consumer Durables industry.

Check out our latest analysis for Champion Homes

In the above chart we have measured Champion Homes' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Champion Homes .

What The Trend Of ROCE Can Tell Us

In terms of Champion Homes' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 16% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Champion Homes is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 176% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Champion Homes does come with some risks, and we've found 1 warning sign that you should be aware of.

While Champion 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.