Returns On Capital Are Showing Encouraging Signs At M/I Homes (NYSE:MHO)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in M/I Homes' (NYSE:MHO) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for M/I Homes:

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

0.19 = US$526m ÷ (US$3.3b - US$488m) (Based on the trailing twelve months to March 2022).

So, M/I Homes has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 16%.

Check out our latest analysis for M/I Homes

roce

Above you can see how the current ROCE for M/I Homes compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Investors would be pleased with what's happening at M/I Homes. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 121%. So we're very much inspired by what we're seeing at M/I Homes thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, M/I Homes 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 solid 51% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if M/I Homes can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with M/I Homes and understanding this should be part of your investment process.

While M/I Homes may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.