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Investors Should Be Encouraged By D.R. Horton's (NYSE:DHI) Returns On Capital

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in D.R. Horton's (NYSE:DHI) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for D.R. Horton:

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

0.30 = US$6.6b ÷ (US$27b - US$4.8b) (Based on the trailing twelve months to March 2022).

Therefore, D.R. Horton has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

See our latest analysis for D.R. Horton

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Above you can see how the current ROCE for D.R. Horton 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 D.R. Horton here for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at D.R. Horton. Over the last five years, returns on capital employed have risen substantially to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 114% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

To sum it up, D.R. Horton has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 110% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing D.R. Horton we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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