Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Dunelm Group's (LON:DNLM) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dunelm Group, this is the formula:

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

0.48 = UK￡204m ÷ (UK￡721m - UK￡294m) (Based on the trailing twelve months to December 2023).

Therefore, Dunelm Group has an ROCE of 48%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 9.8%.

See our latest analysis for Dunelm Group

In the above chart we have measured Dunelm Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dunelm Group for free.

So How Is Dunelm Group's ROCE Trending?

Investors would be pleased with what's happening at Dunelm Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 48%. Basically the business is earning more per dollar of capital invested and in addition to that, 48% more capital is being employed now too. So we're very much inspired by what we're seeing at Dunelm Group thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Dunelm Group has a current liabilities to total assets ratio of 41%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

All in all, it's terrific to see that Dunelm Group is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 88% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.