Data Patterns (India) (NSE:DATAPATTNS) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Data Patterns (India)'s (NSE:DATAPATTNS) trend of ROCE, we liked what we saw.

What Is 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 = ₹1.8b ÷ (₹15b - ₹2.5b) (Based on the trailing twelve months to September 2023).

Thus, Data Patterns (India) has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Aerospace & Defense industry.

Check out 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 report for Data Patterns (India).

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. Over the past four years, ROCE has remained relatively flat at around 15% and the business has deployed 603% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Data Patterns (India) has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

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

To sum it up, Data Patterns (India) has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 34% to shareholders over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Data Patterns (India), we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.