DFI Retail Group Holdings (SGX:D01) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at DFI Retail Group Holdings (SGX:D01) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DFI Retail Group Holdings, this is the formula:

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

0.078 = US$275m ÷ (US$6.9b - US$3.4b) (Based on the trailing twelve months to June 2023).

Thus, DFI Retail Group Holdings has an ROCE of 7.8%. Even though it's in line with the industry average of 8.4%, it's still a low return by itself.

See our latest analysis for DFI Retail Group Holdings

In the above chart we have measured DFI Retail Group Holdings' 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 DFI Retail Group Holdings.

What Can We Tell From DFI Retail Group Holdings' ROCE Trend?

On the surface, the trend of ROCE at DFI Retail Group Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.8% from 20% five years ago. However it looks like DFI Retail Group Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, DFI Retail Group Holdings has done well to pay down its current liabilities to 49% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From DFI Retail Group Holdings' ROCE

To conclude, we've found that DFI Retail Group Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 67% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, DFI Retail Group Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While DFI Retail Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.