If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Dunelm Group (LON:DNLM) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Dunelm Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.48 = UK£204m ÷ (UK£721m – UK£294m) (Based on the trailing twelve months to December 2023).
Therefore, Dunelm Group has an ROCE of 48%. In absolute terms that’s a great return and it’s even better than the Specialty Retail industry average of 14%.
Check out our latest analysis for Dunelm Group
In the above chart we have measured Dunelm Group’s 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 Dunelm Group .
What Can We Tell From Dunelm Group’s ROCE Trend?
Dunelm Group is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 48%. 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 48%. 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.
On a separate but related note, it’s important to know that Dunelm Group has a current liabilities to total assets ratio of 41%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In summary, it’s great to see that Dunelm Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 82% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Dunelm Group does come with some risks, and we’ve found 1 warning sign that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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.
