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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Netflix (NASDAQ:NFLX) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 Netflix is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$5.7b ÷ (US$48b - US$7.8b) (Based on the trailing twelve months to September 2022).
So, Netflix has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Entertainment industry.
See our latest analysis for Netflix
In the above chart we have measured Netflix's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Netflix.
So How Is Netflix's ROCE Trending?
We like the trends that we're seeing from Netflix. The data shows that returns on capital have increased substantially over the last five years to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 242% more capital is being employed now too. So we're very much inspired by what we're seeing at Netflix thanks to its ability to profitably reinvest capital.
One more thing to note, Netflix has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Netflix has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Key Takeaway
In summary, it's great to see that Netflix can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 40% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Netflix can keep these trends up, it could have a bright future ahead.