In This Article:
If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at DATRON (ETR:DAR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 DATRON, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = €5.1m ÷ (€67m - €7.7m) (Based on the trailing twelve months to June 2024).
So, DATRON has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.
View our latest analysis for DATRON
In the above chart we have measured DATRON's 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 DATRON .
The Trend Of ROCE
On the surface, the trend of ROCE at DATRON doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.5% from 14% five years ago. However it looks like DATRON 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.
Our Take On DATRON's ROCE
Bringing it all together, while we're somewhat encouraged by DATRON's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 21% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you want to know some of the risks facing DATRON we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.
While DATRON isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.