In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in DFS Furniture's (LON:DFS) returns on capital, so let's have a look.
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. 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)
0.10 = UK£71m ÷ (UK£1.0b - UK£335m) (Based on the trailing twelve months to December 2023).
Thus, DFS Furniture has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Specialty Retail industry average it falls behind.
See our latest analysis for DFS Furniture
In the above chart we have measured DFS Furniture's 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 DFS Furniture for free.
What Can We Tell From DFS Furniture's ROCE Trend?
Investors would be pleased with what's happening at DFS Furniture. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 32%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On DFS Furniture's ROCE
All in all, it's terrific to see that DFS Furniture is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 44% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing: We've identified 4 warning signs with DFS Furniture (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.