Returns At Netflix (NASDAQ:NFLX) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 looked at Netflix (NASDAQ:NFLX) and its trend of ROCE, we really liked what we saw.

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 Netflix is:

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

0.15 = US$6.0b ÷ (US$50b - US$8.3b) (Based on the trailing twelve months to September 2023).

Thus, Netflix has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Entertainment industry.

View our latest analysis for Netflix

In the above chart we have measured Netflix's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Netflix here for free.

What Does the ROCE Trend For Netflix Tell Us?

Investors would be pleased with what's happening at Netflix. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 141%. So we're very much inspired by what we're seeing at Netflix thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 17%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Netflix's ROCE

All in all, it's terrific to see that Netflix is reaping the rewards from prior investments and is growing its capital base. And with a respectable 78% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Netflix looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NFLX is currently trading for a fair price.

While Netflix 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.