There are a few key trends to look out for if we want to identify the next multi-bagger. Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. That said, at a first glance at General dollar (NYSE:DG) we’re not jumping off our chairs on the yield trend, but taking a closer look.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested 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)
0.16 = $3.3 billion ÷ ($26 billion – $5.7 billion) (Based on the last twelve months to October 2021).
So, Dollar General has a ROCE of 16%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the multiline retail industry average of 14%.
See our latest analysis for Dollar General
In the chart above, we measured Dollar General’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So, what is the ROCE trend for Dollar General?
On the surface, the ROCE trend at Dollar General does not inspire confidence. About five years ago, the return on capital was 22%, but since then it has fallen to 16%. Meanwhile, the company is using more capital, but that hasn’t changed much in terms of sales over the past 12 months, so that could reflect longer-term investments. It may take some time before the company begins to see a change in the income from these investments.
What we can learn from Dollar General’s ROCE
In summary, while we are somewhat encouraged by Dollar General’s reinvestment in its own business, we are aware that returns are diminishing. Investors must think there are better things to come because the stock knocked it out of the park, delivering a 186% gain to shareholders who have held it over the past five years. However, unless these underlying trends turn more positive, we wouldn’t be too hopeful.
If you want to know more about the risks that Dollar General faces, we have discovered 1 warning sign of which you should be aware.
Although Dollar General does not generate the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.