The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between DATA Communications Management Corp (TSE:DCM)’s return fundamentals and stock market performance.
Purchasing DATA Communications Management gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to DCM’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently DATA Communications Management is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Check out our latest analysis for DATA Communications Management
Calculating Return On Capital Employed for DCM
Choosing to invest in DATA Communications Management comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if DATA Communications Management is good at growing investor capital. I have calculated DATA Communications Management’s ROCE for you below:
ROCE Calculation for DCM
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = CA$5.16m ÷ (CA$137.33m – CA$69.91m) = 7.66%
The calculation above shows that DCM’s earnings were 7.66% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which DCM has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.
Why is this the case?
DCM doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of DCM’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that DCM boosted investor return on capital employed from 6.50%. In this time, earnings have actually fallen from CA$7.52m to CA$5.16m, but the use of capital has fallen further due to a decreased level of total assets employed and increase in current liabilities (more borrowed money) , indicating that the previous decline in earnings has not destroyed ROCE because the company now has smaller capital needs to operate the business.
Next Steps
ROCE for DCM investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and management ability to determine whether there is potential for return by focusing our attention elsewhere. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for DCM’s future growth? Take a look at our free research report of analyst consensus for DCM’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for DATA Communications Management’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.