Returns On Capital Are A Standout For Dillard's (NYSE:DDS)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. And in light of that, the trends we're seeing at Dillard's' (NYSE:DDS) look very promising so lets take a look.

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. The formula for this calculation on Dillard's is:

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

0.39 = US$1.0b ÷ (US$3.5b - US$927m) (Based on the trailing twelve months to July 2023).

Therefore, Dillard's has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

See our latest analysis for Dillard's

In the above chart we have measured Dillard'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 Dillard's.

What The Trend Of ROCE Can Tell Us

Dillard's has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 234% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Dillard's' ROCE

To sum it up, Dillard's is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 360% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Dillard's can keep these trends up, it could have a bright future ahead.

Dillard's does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.