Has Nextcom (TLV:NXTM) Got What It Takes To Become A Multi-Bagger?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Nextcom's (TLV:NXTM) trend of ROCE, we liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nextcom, this is the formula:

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

0.16 = ₪22m ÷ (₪235m - ₪100m) (Based on the trailing twelve months to September 2020).

Therefore, Nextcom has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 9.8% it's much better.

See our latest analysis for Nextcom

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Nextcom's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Nextcom's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 181% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that Nextcom has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 43% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

What We Can Learn From Nextcom's ROCE

The main thing to remember is that Nextcom has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 365% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Nextcom, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Nextcom 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. 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.
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