If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think National Instruments (NASDAQ:NATI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for National Instruments:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = US$131m ÷ (US$1.8b - US$353m) (Based on the trailing twelve months to September 2021).
So, National Instruments has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Electronic industry average of 9.9%.
Check out our latest analysis for National Instruments
Above you can see how the current ROCE for National Instruments 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 report on analyst forecasts for the company.
What Can We Tell From National Instruments' ROCE Trend?
There are better returns on capital out there than what we're seeing at National Instruments. The company has consistently earned 8.8% for the last five years, and the capital employed within the business has risen 22% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
Long story short, while National Instruments has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 69% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 4 warning signs for National Instruments you'll probably want to know about.