We're Watching These Trends At Resideo Technologies (NYSE:REZI)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Resideo Technologies (NYSE:REZI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Resideo Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$349m ÷ (US$5.6b - US$1.5b) (Based on the trailing twelve months to December 2020).
So, Resideo Technologies has an ROCE of 8.6%. In absolute terms, that's a low return and it also under-performs the Building industry average of 14%.
See our latest analysis for Resideo Technologies
In the above chart we have measured Resideo Technologies' 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 Resideo Technologies here for free.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Resideo Technologies. The company has consistently earned 8.6% for the last four years, and the capital employed within the business has risen 27% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
As we've seen above, Resideo Technologies' returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 464% gain to shareholders who have held over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 5 warning signs for Resideo Technologies you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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