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. So when we looked at Tri Pointe Homes (NYSE:TPH) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tri Pointe Homes is:

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

0.13 = US$586m ÷ (US$4.8b - US$373m) (Based on the trailing twelve months to September 2024).

So, Tri Pointe Homes has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Consumer Durables industry.

View our latest analysis for Tri Pointe Homes

In the above chart we have measured Tri Pointe Homes' 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 Tri Pointe Homes for free.

The Trend Of ROCE

Tri Pointe Homes' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 78% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Tri Pointe Homes' ROCE

In summary, we're delighted to see that Tri Pointe Homes has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Tri Pointe Homes can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Tri Pointe Homes we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Tri Pointe Homes 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.