When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within United Homes Group (NASDAQ:UHG), we weren't too hopeful.
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. Analysts use this formula to calculate it for United Homes Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$8.3m ÷ (US$283m - US$110m) (Based on the trailing twelve months to September 2024).
So, United Homes Group has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 14%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for United Homes Group's ROCE against it's prior returns. If you're interested in investigating United Homes Group's past further, check out this free graph covering United Homes Group's past earnings, revenue and cash flow.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at United Homes Group. Unfortunately the returns on capital have diminished from the 36% that they were earning three years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on United Homes Group becoming one if things continue as they have.
On a side note, United Homes Group's current liabilities have increased over the last three years to 39% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
The Bottom Line On United Homes Group's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 29% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
United Homes Group does have some risks though, and we've spotted 1 warning sign for United Homes Group that you might be interested in.
While United Homes Group 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.
