Does Nxt-ID (NASDAQ:NXTD) Have The Makings Of A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Nxt-ID (NASDAQ:NXTD) 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. Analysts use this formula to calculate it for Nxt-ID:

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

0.062 = US$1.2m ÷ (US$25m - US$5.7m) (Based on the trailing twelve months to September 2020).

Thus, Nxt-ID has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Software industry average of 9.7%.

See our latest analysis for Nxt-ID

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nxt-ID's ROCE against it's prior returns. If you'd like to look at how Nxt-ID has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Nxt-ID's ROCE Trending?

The fact that Nxt-ID is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 6.2% on its capital. Not only that, but the company is utilizing 2,772% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Nxt-ID has decreased current liabilities to 23% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Nxt-ID's ROCE

To the delight of most shareholders, Nxt-ID has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 92% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Like most companies, Nxt-ID does come with some risks, and we've found 3 warning signs that you should be aware of.

While Nxt-ID 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. 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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