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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Hovnanian Enterprises (NYSE:HOV) so let's look a bit deeper.
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. The formula for this calculation on Hovnanian Enterprises is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$288m ÷ (US$2.3b - US$456m) (Based on the trailing twelve months to April 2024).
Thus, Hovnanian Enterprises has an ROCE of 15%. By itself that's a normal return on capital and it's in line with the industry's average returns of 15%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hovnanian Enterprises' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hovnanian Enterprises.
What Does the ROCE Trend For Hovnanian Enterprises Tell Us?
Hovnanian Enterprises has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 400% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To bring it all together, Hovnanian Enterprises has done well to increase the returns it's generating from its capital employed. And a remarkable 3,037% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 3 warning signs for Hovnanian Enterprises you'll probably want to know about.
While Hovnanian Enterprises 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.