Here's What's Concerning About Dollar General's (NYSE:DG) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Dollar General (NYSE:DG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Dollar General, this is the formula:

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

0.10 = US$2.5b ÷ (US$31b - US$6.7b) (Based on the trailing twelve months to February 2024).

Thus, Dollar General has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Retailing industry average of 11%.

See our latest analysis for Dollar General

In the above chart we have measured Dollar General's 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 analyst report for Dollar General .

The Trend Of ROCE

On the surface, the trend of ROCE at Dollar General doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 21% five years ago. However it looks like Dollar General 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Dollar General's ROCE

To conclude, we've found that Dollar General is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 34% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Dollar General does have some risks though, and we've spotted 3 warning signs for Dollar General that you might be interested in.

While Dollar General 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.