Yahoo Finance Barratt Developments' (LON:BDEV) Returns Have Hit A Wall
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 ran our eye over Barratt Developments' (LON:BDEV) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Barratt Developments:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = UK£916m ÷ (UK£7.5b - UK£1.4b) (Based on the trailing twelve months to December 2021).
Therefore, Barratt Developments has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Consumer Durables industry.
See our latest analysis for Barratt Developments
In the above chart we have measured Barratt Developments' 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 report on analyst forecasts for the company.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 30% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Barratt Developments has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Barratt Developments' ROCE
To sum it up, Barratt Developments has simply been reinvesting capital steadily, at those decent rates of return. However, over the last five years, the stock has only delivered a 5.9% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
Barratt Developments does have some risks though, and we've spotted 1 warning sign for Barratt Developments that you might be interested in.
While Barratt Developments 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.
