Here's What's Concerning About Nagarro's (ETR:NA9) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 investigating Nagarro (ETR:NA9), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

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 Nagarro is:

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

0.17 = €98m ÷ (€732m - €167m) (Based on the trailing twelve months to September 2024).

So, Nagarro has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.

See our latest analysis for Nagarro

Above you can see how the current ROCE for Nagarro 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 Nagarro for free.

How Are Returns Trending?

When we looked at the ROCE trend at Nagarro, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 17%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Nagarro has decreased its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Nagarro's ROCE

To conclude, we've found that Nagarro is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Nagarro has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Nagarro that we think you should be aware of.

While Nagarro 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.