There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over DFS Furniture’s (LON:DFS) trend of ROCE, we liked what we saw.
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. To calculate this metric for DFS Furniture, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = UK£88m ÷ (UK£1.1b – UK£395m) (Based on the trailing twelve months to June 2022).
So, DFS Furniture has an ROCE of 12%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Specialty Retail industry average of 13%.
furniture-shares?blueprint=2347152&utm_medium=finance_user&utm_campaign=cta&utm_source=yahoo” data-ylk=”slk:See our latest analysis for DFS Furniture” class=”link “See our latest analysis for DFS Furniture
Above you can see how the current ROCE for DFS Furniture 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 analyst forecasts for the company” class=”link “report on analyst forecasts for the company.
How Are Returns Trending?
While the current returns on capital are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 39% more capital into its operations. 12% is