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 a pretty standard return, and it provides some comfort knowing that DFS Furniture has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
The main thing to remember is that DFS Furniture has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 5.2% over the last five years, we’d suspect the market is beginning to recognize these trends. That’s why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
If you’d like to know about the risks facing DFS Furniture, we’ve discovered 2 warning signs that you should be aware of.
While DFS Furniture 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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