Returns On Capital Signal Tricky Times Ahead For DFI Retail Group Holdings (SGX:D01)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at DFI Retail Group Holdings (SGX:D01) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on DFI Retail Group Holdings is:

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

0.063 = US$230m ÷ (US$7.3b - US$3.7b) (Based on the trailing twelve months to December 2022).

Therefore, DFI Retail Group Holdings has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.7%.

Check out 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. To be more specific, ROCE has fallen from 15% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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' current liabilities are still rather high at 50% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On DFI Retail Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by DFI Retail Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 64% in the last five years. Therefore based on the analysis done in this article, we don't think DFI Retail Group Holdings has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for DFI Retail Group Holdings you'll probably want to know about.

While DFI Retail Group Holdings 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.