Tri Pointe Homes (NYSE:TPH) Shareholders Will Want The ROCE Trajectory To Continue
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Tri Pointe Homes (NYSE:TPH) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)
0.18 = US$779m ÷ (US$4.7b - US$308m) (Based on the trailing twelve months to December 2022).
Thus, Tri Pointe Homes has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 17% generated by the Consumer Durables industry.
See our latest analysis for Tri Pointe Homes
Above you can see how the current ROCE for Tri Pointe Homes compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tri Pointe Homes here for free.
What Can We Tell From Tri Pointe Homes' ROCE Trend?
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 18%. The amount of capital employed has increased too, by 25%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
To sum it up, Tri Pointe Homes has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 52% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 2 warning signs we've spotted with Tri Pointe Homes (including 1 which is a bit concerning) .
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.
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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.
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