What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, KB Home (NYSE:KBH) looks quite promising in regards to its trends of return on capital.
Understanding 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 KB Home:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$769m ÷ (US$6.8b – US$989m) (Based on the trailing twelve months to August 2024).
Therefore, KB Home has an ROCE of 13%. That’s a relatively normal return on capital, and it’s around the 14% generated by the Consumer Durables industry.
See our latest analysis for KB Home
Above you can see how the current ROCE for KB Home 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 analyst report for KB Home .
The Trend Of ROCE
Investors would be pleased with what’s happening at KB Home. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 53%. So we’re very much inspired by what we’re seeing at KB Home thanks to its ability to profitably reinvest capital.
In Conclusion…
All in all, it’s terrific to see that KB Home is reaping the rewards from prior investments and is growing its capital base. And a remarkable 151% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it’s worth looking further into this stock because if KB Home can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation for KBH on our platform that is definitely worth checking out.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
