Here's What's Concerning About NEXT's (LON:NXT) Returns On Capital
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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, while the ROCE is currently high for NEXT (LON:NXT), we aren't jumping out of our chairs because returns are decreasing.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for NEXT:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = UK£901m ÷ (UK£4.0b - UK£1.2b) (Based on the trailing twelve months to January 2022).
So, NEXT has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.
View our latest analysis for NEXT
Above you can see how the current ROCE for NEXT compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering NEXT here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at NEXT doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 49%. 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 NEXT's ROCE
While returns have fallen for NEXT in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 75% to shareholders over the last five 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.
Like most companies, NEXT does come with some risks, and we've found 2 warning signs that you should be aware of.
NEXT is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
