Investors Should Be Encouraged By NEXT's (LON:NXT) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of NEXT (LON:NXT) looks great, so lets see what the trend can tell us.

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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. To calculate this metric for NEXT, this is the formula:

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

0.33 = UK£1.2b ÷ (UK£5.3b - UK£1.8b) (Based on the trailing twelve months to July 2025).

So, NEXT has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 15%.

View our latest analysis for NEXT

Above you can see how the current ROCE for NEXT compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for NEXT .

The Trend Of ROCE

The trends we've noticed at NEXT are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 27% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 34% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On NEXT's ROCE

To sum it up, NEXT has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 133% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if NEXT can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with NEXT and understanding it should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.