Data Patterns (India) (NSE:DATAPATTNS) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Data Patterns (India)'s (NSE:DATAPATTNS) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Data Patterns (India) is:

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

0.24 = ₹1.5b ÷ (₹7.3b - ₹1.1b) (Based on the trailing twelve months to September 2022).

Therefore, Data Patterns (India) has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Aerospace & Defense industry average of 12%.

See our latest analysis for Data Patterns (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Data Patterns (India)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Data Patterns (India), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Data Patterns (India) are quite reassuring. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 24%. The amount of capital employed has increased too, by 252%. So we're very much inspired by what we're seeing at Data Patterns (India) thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 15%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Data Patterns (India) has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 35% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Data Patterns (India) you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.