Data Applications Company's (TSE:3848) Returns On Capital Not Reflecting Well On The Business

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Data Applications Company (TSE:3848), 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. To calculate this metric for Data Applications Company, this is the formula:

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

0.12 = JP¥491m ÷ (JP¥5.3b - JP¥1.2b) (Based on the trailing twelve months to March 2023).

Therefore, Data Applications Company has an ROCE of 12%. In isolation, that's a pretty standard return but against the IT industry average of 16%, it's not as good.

Check out our latest analysis for Data Applications Company

Historical performance is a great place to start when researching a stock so above you can see the gauge for Data Applications Company's ROCE against it's prior returns. If you're interested in investigating Data Applications Company's past further, check out this free graph covering Data Applications Company's past earnings, revenue and cash flow.

What Can We Tell From Data Applications Company's ROCE Trend?

In terms of Data Applications Company's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 21% five years ago. However it looks like Data Applications Company 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.

What We Can Learn From Data Applications Company's ROCE

In summary, Data Applications Company is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Data Applications Company (including 1 which is a bit concerning) .

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.

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