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Will Tri Pointe Homes' (NYSE:TPH) Growth In ROCE Persist?

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Simply Wall St
·3 min read
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Speaking of which, we noticed some great changes in Tri Pointe Homes' (NYSE:TPH) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Tri Pointe Homes is:

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

0.11 = US$405m ÷ (US$4.0b - US$244m) (Based on the trailing twelve months to September 2020).

Therefore, Tri Pointe Homes has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Consumer Durables industry average it falls behind.

Check out our latest analysis for Tri Pointe Homes

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In the above chart we have measured Tri Pointe Homes' 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 Tri Pointe Homes here for free.

So How Is Tri Pointe Homes' ROCE Trending?

The trends we've noticed at Tri Pointe Homes are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 26%. So we're very much inspired by what we're seeing at Tri Pointe Homes thanks to its ability to profitably reinvest capital.

What We Can Learn From Tri Pointe Homes' ROCE

In summary, it's great to see that Tri Pointe 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 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.

Tri Pointe Homes does have some risks though, and we've spotted 1 warning sign for Tri Pointe Homes that you might be interested in.

While Tri Pointe 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.

This article by Simply Wall St is general in nature. 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 (at) simplywallst.com.