Dream Finders Homes (NYSE:DFH) Is Looking To Continue Growing Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Dream Finders Homes' (NYSE:DFH) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Dream Finders Homes is:

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

0.19 = US$409m ÷ (US$2.4b - US$260m) (Based on the trailing twelve months to September 2023).

Therefore, Dream Finders Homes has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Consumer Durables industry.

Check out our latest analysis for Dream Finders Homes

In the above chart we have measured Dream Finders Homes' 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 Dream Finders Homes.

So How Is Dream Finders Homes' ROCE Trending?

The trends we've noticed at Dream Finders Homes are quite reassuring. Over the last four years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 436% 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.

The Key Takeaway

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. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Dream Finders Homes you'll probably want to know about.

While Dream Finders Homes 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.