Will Toll Brothers (NYSE:TOL) Multiply In Value Going Forward?

Simply Wall St
·3 min read

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Toll Brothers (NYSE:TOL) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Toll Brothers, this is the formula:

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

0.061 = US$554m ÷ (US$11b - US$1.5b) (Based on the trailing twelve months to July 2020).

Thus, Toll Brothers has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.

Check out our latest analysis for Toll Brothers

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Above you can see how the current ROCE for Toll Brothers 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.

What Does the ROCE Trend For Toll Brothers Tell Us?

There hasn't been much to report for Toll Brothers' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Toll Brothers doesn't end up being a multi-bagger in a few years time.

Our Take On Toll Brothers' ROCE

In a nutshell, Toll Brothers has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Toll Brothers does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. 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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