Dis-Chem Pharmacies (JSE:DCP) Knows How To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Dis-Chem Pharmacies (JSE:DCP) looks attractive right now, so lets see what the trend of returns can tell us.

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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. Analysts use this formula to calculate it for Dis-Chem Pharmacies:

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

0.23 = R2.1b ÷ (R19b - R10b) (Based on the trailing twelve months to February 2025).

Thus, Dis-Chem Pharmacies has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 18%.

View our latest analysis for Dis-Chem Pharmacies

In the above chart we have measured Dis-Chem Pharmacies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dis-Chem Pharmacies .

The Trend Of ROCE

It's hard not to be impressed by Dis-Chem Pharmacies' returns on capital. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 67% in that time. Now considering ROCE is an attractive 23%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a separate but related note, it's important to know that Dis-Chem Pharmacies has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Dis-Chem Pharmacies' ROCE

In summary, we're delighted to see that Dis-Chem Pharmacies has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 79% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Dis-Chem Pharmacies, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.