If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Darktrace (LON:DARK) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Darktrace:

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

0.035 = US$14m ÷ (US$729m - US$324m) (Based on the trailing twelve months to June 2022).

So, Darktrace has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.4%.

View our latest analysis for Darktrace

In the above chart we have measured Darktrace's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Darktrace.

The Trend Of ROCE

Darktrace has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 3.5% on its capital. Not only that, but the company is utilizing 596% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 44%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On Darktrace's ROCE

Long story short, we're delighted to see that Darktrace's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 48% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.