If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Barratt Developments' (LON:BDEV) trend of ROCE, we liked what we saw.
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 Barratt Developments:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£1.1b ÷ (UK£8.2b - UK£1.7b) (Based on the trailing twelve months to June 2022).
Therefore, Barratt Developments has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 15%.
In the above chart we have measured Barratt Developments' 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 report for Barratt Developments.
So How Is Barratt Developments' ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 32% in that time. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
In the end, Barratt Developments has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
One more thing: We've identified 3 warning signs with Barratt Developments (at least 1 which can't be ignored) , and understanding these would certainly be useful.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here