Why We Like The Returns At Dunelm Group (LON:DNLM)
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Dunelm Group's (LON:DNLM) look very promising so lets take a look.
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. Analysts use this formula to calculate it for Dunelm Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = UK£218m ÷ (UK£738m - UK£276m) (Based on the trailing twelve months to July 2022).
Therefore, Dunelm Group has an ROCE of 47%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
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'd like to see what analysts are forecasting going forward, you should check out our free report for Dunelm Group.
What Can We Tell From Dunelm Group's ROCE Trend?
We like the trends that we're seeing from Dunelm Group. Over the last five years, returns on capital employed have risen substantially to 47%. 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 58%. 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 Key Takeaway
To sum it up, Dunelm Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 36% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Dunelm Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
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.
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