Stock Analysis

Investors Could Be Concerned With Dollar General's (NYSE:DG) Returns On Capital

NYSE:DG
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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Dollar General (NYSE:DG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Dollar General is:

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

0.14 = US$3.3b ÷ (US$30b - US$6.1b) (Based on the trailing twelve months to May 2023).

So, Dollar General has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 12% it's much better.

See our latest analysis for Dollar General

roce
NYSE:DG Return on Capital Employed June 29th 2023

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 report for Dollar General.

SWOT Analysis for Dollar General

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings and cashflows.
Weakness
  • Earnings growth over the past year is below its 5-year average.
  • Dividend is low compared to the top 25% of dividend payers in the Consumer Retailing market.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Good value based on P/E ratio and estimated fair value.
  • Significant insider buying over the past 3 months.
Threat
  • Dividends are not covered by cash flow.
  • Annual earnings are forecast to grow slower than the American market.

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 14% from 20% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Dollar General is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 78% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

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

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

Valuation is complex, but we're helping make it simple.

Find out whether Dollar General is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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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.