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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Nuix (ASX:NXL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Nuix, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = AU$14m ÷ (AU$397m - AU$84m) (Based on the trailing twelve months to June 2024).
Therefore, Nuix has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.
View our latest analysis for Nuix
In the above chart we have measured Nuix's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Nuix .
What Does the ROCE Trend For Nuix Tell Us?
When we looked at the ROCE trend at Nuix, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 4.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Nuix'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 Nuix. And long term investors must be optimistic going forward because the stock has returned a huge 206% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
On a final note, we've found 2 warning signs for Nuix that we think you should be aware of.