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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at PulteGroup's (NYSE:PHM) look very promising so lets take a look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on PulteGroup is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$3.6b ÷ (US$17b - US$2.6b) (Based on the trailing twelve months to June 2024).
Thus, PulteGroup has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.
In the above chart we have measured PulteGroup's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for PulteGroup .
The Trend Of ROCE
The trends we've noticed at PulteGroup are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 77% more capital is being employed now too. So we're very much inspired by what we're seeing at PulteGroup thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that PulteGroup is reaping the rewards from prior investments and is growing its capital base. And a remarkable 299% 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.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for PulteGroup (of which 1 shouldn't be ignored!) that you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
