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. With that in mind, we've noticed some promising trends at Toll Brothers (NYSE:TOL) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Toll Brothers:

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

0.19 = US$2.0b ÷ (US$13b - US$2.6b) (Based on the trailing twelve months to July 2024).

Thus, Toll Brothers has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 14% it's much better.

View our latest analysis for Toll Brothers

In the above chart we have measured Toll Brothers' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Toll Brothers .

What Can We Tell From Toll Brothers' ROCE Trend?

Toll Brothers is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 107% 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 Toll Brothers' ROCE

In summary, we're delighted to see that Toll Brothers has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 303% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Toll Brothers can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Toll Brothers you'll probably want to know about.