We Think Data#3 (ASX:DTL) Might Have The DNA Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Data#3's (ASX:DTL) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Data#3 is:

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

0.47 = AU$36m ÷ (AU$294m - AU$217m) (Based on the trailing twelve months to December 2020).

So, Data#3 has an ROCE of 47%. In absolute terms that's a great return and it's even better than the IT industry average of 10%.

See our latest analysis for Data#3

Above you can see how the current ROCE for Data#3 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 report for Data#3.

What Does the ROCE Trend For Data#3 Tell Us?

The trends we've noticed at Data#3 are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 47%. The amount of capital employed has increased too, by 100%. So we're very much inspired by what we're seeing at Data#3 thanks to its ability to profitably reinvest capital.

On a side note, Data#3's current liabilities are still rather high at 74% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Data#3's ROCE

To sum it up, Data#3 has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 556% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Data#3 you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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