Here's What To Make Of Nexus' (ETR:NXU) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Nexus (ETR:NXU) and its ROCE trend, we weren't exactly thrilled.

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 Nexus:

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

0.099 = €27m ÷ (€334m - €62m) (Based on the trailing twelve months to September 2022).

Thus, Nexus has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Healthcare Services industry average of 11%.

See our latest analysis for Nexus

In the above chart we have measured Nexus' 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 Nexus here for free.

How Are Returns Trending?

The returns on capital haven't changed much for Nexus in recent years. The company has employed 121% more capital in the last five years, and the returns on that capital have remained stable at 9.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while Nexus has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 89% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in Nexus it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Nexus 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.