There are a few key trends to look out for if we want to identify the next multi-bagger. In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. Speaking of which, we’ve noticed big changes in Datadog’s (NASDAQ:DDOG) returns on capital, so let’s take a look.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for Datadog, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0021 = $4.1 million ÷ ($2.5 billion – $602 million) (Based on the last twelve months to March 2022).
So, Datadog has a ROCE of 0.2%. Ultimately, it’s a poor performer and it underperforms the software industry average by 9.9%.
Check out our latest analysis for Datadog
In the chart above, we measured Datadog’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out analyst forecasts covering Datadog here for free.
What does Datadog’s ROCE trend tell us?
The fact that Datadog is now generating pre-tax profits on its past investments is very encouraging. About four years ago, the company was generating losses, but things have reversed as it now earns 0.2% on its capital. And unsurprisingly, like most companies trying to break into the dark, Datadog is using 2,683% more capital than four years ago. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.
In another part of our analysis, we noticed that the ratio of the company’s current liabilities to total assets decreased to 24%, which overall means that the company relies less on its suppliers or short-term creditors. term to finance its operations. Therefore, we can be confident that the growth in ROCE is the result of fundamental company improvements, rather than a cooking class showcasing this company’s books.
The Key Takeaway
Overall, Datadog is getting a big boost from us thanks in large part to the fact that they are now profitable and reinvesting in their business. Given that the stock’s total return has been almost flat over the past year, there could be an opportunity here if the valuation looks good. It therefore seems warranted to do further research on this company and determine whether or not these trends will continue.
One more thing we spotted 4 warning signs facing Datadog that might be of interest to you.
Although Datadog doesn’t get the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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