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Under The Bonnet, LGI Homes' (NASDAQ:LGIH) Returns Look Impressive

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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in LGI Homes' (NASDAQ:LGIH) returns on capital, so let's have a look.

Understanding 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 LGI Homes is:

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

0.26 = US$438m ÷ (US$1.8b - US$118m) (Based on the trailing twelve months to March 2021).

Thus, LGI Homes has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.

See our latest analysis for LGI Homes

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Above you can see how the current ROCE for LGI Homes compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for LGI Homes.

The Trend Of ROCE

We like the trends that we're seeing from LGI Homes. The data shows that returns on capital have increased substantially over the last five years to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 189% more capital is being employed now too. So we're very much inspired by what we're seeing at LGI Homes thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, LGI Homes has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 547% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 3 warning signs with LGI Homes (at least 1 which can't be ignored) , and understanding these would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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.