Dream Finders Homes (NYSE:DFH) Is Doing The Right Things To Multiply Its Share Price

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Dream Finders Homes (NYSE:DFH) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.18 = US$364m ÷ (US$2.3b - US$239m) (Based on the trailing twelve months to March 2023).

Therefore, Dream Finders Homes has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 17%.

See our latest analysis for Dream Finders Homes

Above you can see how the current ROCE for Dream Finders Homes compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dream Finders Homes here for free.

What Does the ROCE Trend For Dream Finders Homes Tell Us?

We like the trends that we're seeing from Dream Finders Homes. Over the last four years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 545% more capital is being employed now too. So we're very much inspired by what we're seeing at Dream Finders Homes thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 10%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Dream Finders Homes has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Dream Finders Homes' ROCE

To sum it up, Dream Finders Homes has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 1.6% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know about the risks facing Dream Finders Homes, we've discovered 2 warning signs that you should be aware of.

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.