Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company withreturnson capital employed (ROCE) that are increasing, in conjunction with a growingamountof 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. That's why when we briefly looked at LGI Homes' (NASDAQ:LGIH) ROCE trend, we were pretty happy with what we saw. Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for LGI Homes:

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

0.17 = US$287m รท (US$1.8b - US$64m)(Based on the trailing twelve months to September 2020).

So, LGI Homes has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Consumer Durables industry.

View our latest analysis for LGI Homes

Above you can see how the current ROCE for LGI 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 LGI Homesherefor free. How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 257% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns. The Bottom Line

In the end, LGI Homes has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 357% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know about the risks facing LGI Homes, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. 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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