The Trends At Datacolor (VTX:DCN) That You Should Know About

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Datacolor (VTX:DCN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Datacolor:

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

0.0053 = US$251k ÷ (US$66m - US$19m) (Based on the trailing twelve months to September 2020).

Thus, Datacolor has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 12%.

See our latest analysis for Datacolor

Historical performance is a great place to start when researching a stock so above you can see the gauge for Datacolor's ROCE against it's prior returns. If you're interested in investigating Datacolor's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Datacolor's ROCE Trend?

In terms of Datacolor's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 0.5%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Datacolor's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Datacolor have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 0.6% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Datacolor does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While Datacolor isn't earning the highest return, check out this free list of companies that are 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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