Yahoo Finance Dis-Chem Pharmacies' (JSE:DCP) Returns On Capital Not Reflecting Well On The Business
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, while the ROCE is currently high for Dis-Chem Pharmacies (JSE:DCP), we aren't jumping out of our chairs because returns are decreasing.
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)
0.22 = R1.7b ÷ (R17b - R9.0b) (Based on the trailing twelve months to August 2023).
So, Dis-Chem Pharmacies has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 17%.
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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Dis-Chem Pharmacies .
So How Is Dis-Chem Pharmacies' ROCE Trending?
When we looked at the ROCE trend at Dis-Chem Pharmacies, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 39%. However it looks like Dis-Chem Pharmacies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Another thing to note, Dis-Chem Pharmacies has a high ratio of current liabilities to total assets of 54%. 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.
What We Can Learn From Dis-Chem Pharmacies' ROCE
To conclude, we've found that Dis-Chem Pharmacies is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Dis-Chem Pharmacies could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for DCP on our platform quite valuable.
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.
