Yahoo Finance Here's What NEXT's (LON:NXT) Strong Returns On Capital Mean
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at NEXT (LON:NXT), we liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for NEXT, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = UK£969m ÷ (UK£4.7b - UK£1.2b) (Based on the trailing twelve months to January 2024).
Thus, NEXT has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.
Check out our latest analysis for NEXT
Above you can see how the current ROCE for NEXT compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for NEXT .
The Trend Of ROCE
It's hard not to be impressed by NEXT's returns on capital. The company has consistently earned 28% for the last five years, and the capital employed within the business has risen 39% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If NEXT can keep this up, we'd be very optimistic about its future.
What We Can Learn From NEXT's ROCE
In summary, we're delighted to see that NEXT has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 88% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing, we've spotted 2 warning signs facing NEXT that you might find interesting.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.
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