Returns Are Gaining Momentum At Dynatrace (NYSE:DT)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Dynatrace (NYSE:DT) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Dynatrace:

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

0.062 = US$166m ÷ (US$3.7b - US$1.0b) (Based on the trailing twelve months to December 2024).

So, Dynatrace has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.1%.

Check out our latest analysis for Dynatrace

Above you can see how the current ROCE for Dynatrace compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Dynatrace .

What Does the ROCE Trend For Dynatrace Tell Us?

We're delighted to see that Dynatrace is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Dynatrace is utilizing 75% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

Long story short, we're delighted to see that Dynatrace's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 93% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Dynatrace can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Dynatrace (at least 1 which can't be ignored) , and understanding these would certainly be useful.

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.