The Return Trends At Dream Finders Homes (NASDAQ:DFH) Look Promising
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at Dream Finders Homes (NASDAQ:DFH) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Dream Finders Homes, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$112m ÷ (US$1.2b - US$142m) (Based on the trailing twelve months to September 2021).
So, Dream Finders Homes has an ROCE of 10%. In isolation, that's a pretty standard return but against the Consumer Durables industry average of 15%, it's not as good.
View our latest analysis for Dream Finders Homes
In the above chart we have measured Dream Finders Homes' 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 report on analyst forecasts for the company.
So How Is Dream Finders Homes' ROCE Trending?
We like the trends that we're seeing from Dream Finders Homes. The numbers show that in the last two years, the returns generated on capital employed have grown considerably to 10%. The amount of capital employed has increased too, by 175%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Dream Finders Homes' ROCE
In summary, it's great to see that Dream Finders Homes 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 since the stock has fallen 10% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Dream Finders Homes does have some risks though, and we've spotted 1 warning sign for Dream Finders Homes that you might be interested in.
While Dream Finders Homes 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.
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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.
