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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over NEXT's (LON:NXT) trend of ROCE, we really liked what we saw.
Understanding 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. The formula for this calculation on NEXT is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = UK£1.0b ÷ (UK£4.8b - UK£1.5b) (Based on the trailing twelve months to July 2024).
Thus, NEXT has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
View our latest analysis for NEXT
In the above chart we have measured NEXT's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering NEXT for free.
What Does the ROCE Trend For NEXT Tell Us?
NEXT deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 27% more capital into its operations. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If NEXT can keep this up, we'd be very optimistic about its future.
The Bottom Line
In short, we'd argue NEXT has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 52% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
NEXT does have some risks though, and we've spotted 2 warning signs for NEXT that you might be interested in.
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.