Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, the ROCE of DATAGROUP (ETR:D6H) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for DATAGROUP, this is the formula:

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

0.13 = €39m ÷ (€493m - €188m) (Based on the trailing twelve months to December 2023).

Thus, DATAGROUP has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.3% generated by the IT industry.

See our latest analysis for DATAGROUP

Above you can see how the current ROCE for DATAGROUP compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering DATAGROUP for free.

What Does the ROCE Trend For DATAGROUP Tell Us?

While the returns on capital are good, they haven't moved much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 99% in that time. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

The Bottom Line

The main thing to remember is that DATAGROUP has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 32% return to shareholders who held over that period. So to determine if DATAGROUP is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Like most companies, DATAGROUP does come with some risks, and we've found 2 warning signs that you should be aware of.

While DATAGROUP isn't earning the highest return, check out this free list of companies that are 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.