Returns At Nagarro (FRA:NA9) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Nagarro's (FRA:NA9) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Nagarro is:

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

0.17 = €51m ÷ (€427m - €123m) (Based on the trailing twelve months to September 2021).

Therefore, Nagarro has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 9.3% it's much better.

Check out 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 here for free.

What Does the ROCE Trend For Nagarro Tell Us?

We like the trends that we're seeing from Nagarro. Over the last three years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 122% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Nagarro has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Nagarro's ROCE

All in all, it's terrific to see that Nagarro is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 3 warning signs with Nagarro (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While Nagarro isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.