If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at DATRON (ETR:DAR), it didn't seem to tick all of these boxes.
What is 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. The formula for this calculation on DATRON is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = €2.3m ÷ (€38m - €4.7m) (Based on the trailing twelve months to June 2020).
So, DATRON has an ROCE of 7.1%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.
See our latest analysis for DATRON
Above you can see how the current ROCE for DATRON compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering DATRON here for free.
The Trend Of ROCE
When we looked at the ROCE trend at DATRON, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On DATRON's ROCE
In summary, we're somewhat concerned by DATRON's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 10% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a separate note, we've found 2 warning signs for DATRON you'll probably want to know about.
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.
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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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About XTRA:DAR
DATRON
Designs, develops, manufactures, and sells various machining systems worldwide.
Excellent balance sheet and good value.
