The Trend Of High Returns At Nagarro (FRA:NA9) Has Us Very Interested

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. And in light of that, the trends we're seeing at Nagarro's (FRA:NA9) look very promising so lets take a look.

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)

0.20 = €96m ÷ (€664m - €198m) (Based on the trailing twelve months to September 2022).

Thus, Nagarro has an ROCE of 20%. In absolute terms that's a great return and it's even better than the IT industry average of 15%.

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 Can We Tell From Nagarro's ROCE Trend?

We like the trends that we're seeing from Nagarro. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 20%. The amount of capital employed has increased too, by 241%. So we're very much inspired by what we're seeing at Nagarro thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 30%, 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.

The Key Takeaway

To sum it up, Nagarro has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 37% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 1 warning sign facing Nagarro that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.