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. 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. Speaking of which, we noticed some great changes in Lennar's (NYSE:LEN) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Lennar, this is the formula:

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

0.15 = US$5.4b ÷ (US$40b - US$2.7b) (Based on the trailing twelve months to August 2024).

So, Lennar has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Consumer Durables industry.

Above you can see how the current ROCE for Lennar compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Lennar .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Lennar. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 36%. So we're very much inspired by what we're seeing at Lennar thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Lennar has. Since the stock has returned a staggering 216% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Lennar does have some risks though, and we've spotted 1 warning sign for Lennar that you might be interested in.

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

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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.