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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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Cairn Homes (LON:CRN) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Cairn Homes, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = €145m ÷ (€1.2b - €125m) (Based on the trailing twelve months to June 2024).
Thus, Cairn Homes has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Consumer Durables industry.
Check out our latest analysis for Cairn Homes
Above you can see how the current ROCE for Cairn Homes compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cairn Homes for free.
How Are Returns Trending?
Cairn Homes has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 116% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Cairn Homes' ROCE
In summary, we're delighted to see that Cairn Homes has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 114% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 1 warning sign with Cairn Homes and understanding it should be part of your investment process.