Shareholders Would Enjoy A Repeat Of Datalab Tehnologije d.d's (LJSE:DATG) Recent Growth In Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Datalab Tehnologije d.d (LJSE:DATG) we really liked what we saw.

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. Analysts use this formula to calculate it for Datalab Tehnologije d.d:

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

0.30 = €3.7m ÷ (€20m - €7.9m) (Based on the trailing twelve months to June 2022).

Therefore, Datalab Tehnologije d.d has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Software industry average of 12%.

Check out our latest analysis for Datalab Tehnologije d.d

Historical performance is a great place to start when researching a stock so above you can see the gauge for Datalab Tehnologije d.d's ROCE against it's prior returns. If you'd like to look at how Datalab Tehnologije d.d has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Datalab Tehnologije d.d is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 248% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Datalab Tehnologije d.d's ROCE

To sum it up, Datalab Tehnologije d.d is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 427% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Datalab Tehnologije d.d, we've discovered 2 warning signs that you should be aware of.

Datalab Tehnologije d.d is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.