The Returns At Nuix (ASX:NXL) Aren't Growing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. That's why when we briefly looked at Nuix's (ASX:NXL) ROCE trend, we were pretty happy with what we saw.

What is 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. To calculate this metric for Nuix, this is the formula:

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

0.16 = AU$48m ÷ (AU$392m - AU$82m) (Based on the trailing twelve months to December 2021).

So, Nuix has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Software industry.

See our latest analysis for Nuix

In the above chart we have measured Nuix'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 Nuix.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. Over the past four years, ROCE has remained relatively flat at around 16% and the business has deployed 206% more capital into its operations. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Nuix's ROCE

To sum it up, Nuix has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last year the stock has declined 68%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Nuix does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Nuix 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. 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.