Yahoo Finance NEXTDC (ASX:NXT) Will Want To Turn Around Its Return Trends
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at NEXTDC (ASX:NXT), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on NEXTDC is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = AU$50m ÷ (AU$2.9b - AU$59m) (Based on the trailing twelve months to December 2021).
So, NEXTDC has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.
Check out our latest analysis for NEXTDC
Above you can see how the current ROCE for NEXTDC 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 report for NEXTDC.
What Can We Tell From NEXTDC's ROCE Trend?
On the surface, the trend of ROCE at NEXTDC doesn't inspire confidence. To be more specific, ROCE has fallen from 2.8% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On NEXTDC's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for NEXTDC. And the stock has done incredibly well with a 154% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know about the risks facing NEXTDC, we've discovered 2 warning signs that you should be aware of.
While NEXTDC 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.
