Returns On Capital Signal Tricky Times Ahead For Berkeley Group Holdings (LON:BKG)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Berkeley Group Holdings (LON:BKG), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Berkeley Group Holdings is:

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

0.097 = UK£471m ÷ (UK£6.7b - UK£1.9b) (Based on the trailing twelve months to October 2022).

Therefore, Berkeley Group Holdings has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 14%.

Check out our latest analysis for Berkeley Group Holdings

roce

In the above chart we have measured Berkeley Group Holdings' 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 Berkeley Group Holdings here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Berkeley Group Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Berkeley Group Holdings' ROCE

In summary, Berkeley Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 2 warning signs for Berkeley Group Holdings that we think you should be aware of.

While Berkeley Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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