Should You Be Impressed By Nxtdigital's (NSE:NXTDIGITAL) Returns on Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Nxtdigital (NSE:NXTDIGITAL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Nxtdigital:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.027 = ₹392m ÷ (₹25b - ₹10b) (Based on the trailing twelve months to December 2019).

Therefore, Nxtdigital has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Media industry average of 14%.

View our latest analysis for Nxtdigital

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nxtdigital's ROCE against it's prior returns. If you'd like to look at how Nxtdigital has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Nxtdigital's ROCE Trend?

There hasn't been much to report for Nxtdigital's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Nxtdigital doesn't end up being a multi-bagger in a few years time.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 41% of total assets, this reported ROCE would probably be less than2.7% because total capital employed would be higher.The 2.7% ROCE could be even lower if current liabilities weren't 41% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On Nxtdigital's ROCE

In summary, Nxtdigital isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 9.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Nxtdigital (of which 1 is a bit unpleasant!) that you should know about.

While Nxtdigital may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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