What are the early trends to look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. So when we ran our eyes Dunelm Group (LON:DNLM) ROCE trend, we really liked what we saw.
Return on capital employed (ROCE): what is it?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for Dunelm Group, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.41 = £191m ÷ (£729m – £266m) (Based on the last twelve months to December 2021).
Thereby, Dunelm Group has a ROCE of 41%. In absolute terms, that’s an excellent return and even better than the specialty retail industry average of 16%.
Check out our latest analysis for Dunelm Group
Above, you can see how Dunelm Group’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What does the ROCE trend tell us for Dunelm Group?
We would rather be satisfied with returns on capital like Dunelm Group. The company has employed 73% more capital over the past five years, and returns on that capital have remained stable at 41%. Now considering the ROCE is an attractive 41%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. You will see this when you look at well-run businesses or favorable business models.
Our point of view on the ROCE of the Dunelm group
Dunelm Group has demonstrated its competence in generating high returns on increasing amounts of capital employed, which we are delighted about. On top of that, the stock has rewarded shareholders with a remarkable return of 124% for those who have held over the past five years. So while the positive underlying trends can be explained by investors, we still think this stock deserves further investigation.
Finally, we found 2 warning signs for Dunelm Group which we think you should be aware of.
If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.