Data Patterns (India) (NSE:DATAPATTNS) Could Be Struggling To Allocate Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Data Patterns (India) (NSE:DATAPATTNS), it didn't seem to tick all of these boxes.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Data Patterns (India), this is the formula:

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

0.15 = ₹2.0b ÷ (₹17b - ₹3.1b) (Based on the trailing twelve months to December 2024).

Thus, Data Patterns (India) has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Aerospace & Defense industry average of 17%.

See our latest analysis for Data Patterns (India)

In the above chart we have measured Data Patterns (India)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Data Patterns (India) .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Data Patterns (India) doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. However it looks like Data Patterns (India) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Data Patterns (India) has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Data Patterns (India)'s ROCE

Bringing it all together, while we're somewhat encouraged by Data Patterns (India)'s reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 87% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with Data Patterns (India) and understanding it should be part of your investment process.

While Data Patterns (India) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.