Returns Are Gaining Momentum At DFS Furniture (LON:DFS)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at DFS Furniture (LON:DFS) so let's look a bit deeper.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for DFS Furniture:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.084 = UK£56m ÷ (UK£1.0b - UK£350m) (Based on the trailing twelve months to December 2024).

Thus, DFS Furniture has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.

Check out our latest analysis for DFS Furniture

In the above chart we have measured DFS Furniture's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering DFS Furniture for free.

The Trend Of ROCE

DFS Furniture has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 120%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take On DFS Furniture's ROCE

In summary, it's great to see that DFS Furniture has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 15% to shareholders. So with that in mind, we think the stock deserves further research.

On a final note, we found 2 warning signs for DFS Furniture (1 doesn't sit too well with us) you should be aware of.

While DFS Furniture 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.