Some Investors May Be Worried About Dis-Chem Pharmacies' (JSE:DCP) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So while Dis-Chem Pharmacies (JSE:DCP) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding 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. To calculate this metric for Dis-Chem Pharmacies, this is the formula:

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

0.25 = R1.6b ÷ (R14b - R7.5b) (Based on the trailing twelve months to February 2022).

Thus, Dis-Chem Pharmacies has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 14%.

Check out our latest analysis for Dis-Chem Pharmacies

Above you can see how the current ROCE for Dis-Chem Pharmacies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Dis-Chem Pharmacies' ROCE Trend?

On the surface, the trend of ROCE at Dis-Chem Pharmacies doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 44% where it was 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.

Another thing to note, Dis-Chem Pharmacies has a high ratio of current liabilities to total assets of 53%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Dis-Chem Pharmacies' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Dis-Chem Pharmacies. These trends are starting to be recognized by investors since the stock has delivered a 23% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you're still interested in Dis-Chem Pharmacies it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.