The Returns On Capital At D4t4 Solutions (LON:D4T4) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at D4t4 Solutions (LON:D4T4) and its ROCE trend, we weren't exactly thrilled.

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 D4t4 Solutions is:

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

0.10 = UK£2.8m ÷ (UK£31m - UK£3.6m) (Based on the trailing twelve months to March 2021).

So, D4t4 Solutions has an ROCE of 10.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

View our latest analysis for D4t4 Solutions

In the above chart we have measured D4t4 Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering D4t4 Solutions here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at D4t4 Solutions doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

What We Can Learn From D4t4 Solutions' ROCE

In summary, we're somewhat concerned by D4t4 Solutions' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 201%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

D4t4 Solutions does have some risks though, and we've spotted 2 warning signs for D4t4 Solutions that you might be interested in.

While D4t4 Solutions 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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