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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Dollarama's (TSE:DOL) trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Dollarama:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = CA$1.5b ÷ (CA$6.4b - CA$919m) (Based on the trailing twelve months to October 2024).
So, Dollarama has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 12%.
View our latest analysis for Dollarama
Above you can see how the current ROCE for Dollarama compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dollarama for free.
What The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Dollarama's returns on capital. The company has consistently earned 27% for the last five years, and the capital employed within the business has risen 91% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Dollarama can keep this up, we'd be very optimistic about its future.
The Bottom Line
In short, we'd argue Dollarama has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 223% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Dollarama does have some risks though, and we've spotted 2 warning signs for Dollarama that you might be interested in.
Dollarama is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.