To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of 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. Speaking of which, we noticed some great changes in Taylor Morrison Home's (NYSE:TMHC) returns on capital, so let's have a look.

What Is 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 Taylor Morrison Home:

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

0.15 = US$1.2b ÷ (US$9.3b - US$1.1b) (Based on the trailing twelve months to December 2024).

Therefore, Taylor Morrison Home has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.

View our latest analysis for Taylor Morrison Home

In the above chart we have measured Taylor Morrison Home's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Taylor Morrison Home for free.

So How Is Taylor Morrison Home's ROCE Trending?

Taylor Morrison Home is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 15%. 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 77%. 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 Bottom Line On Taylor Morrison Home's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Taylor Morrison Home has. Since the stock has returned a staggering 157% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Taylor Morrison Home looks impressive, no company is worth an infinite price. The intrinsic value infographic for TMHC helps visualize whether it is currently trading for a fair price.

While Taylor Morrison Home 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.