Returns At Rackspace Technology (NASDAQ:RXT) Appear To Be Weighed Down

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Rackspace Technology (NASDAQ:RXT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Rackspace Technology, this is the formula:

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

0.024 = US$112m ÷ (US$5.5b - US$869m) (Based on the trailing twelve months to December 2022).

Therefore, Rackspace Technology has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

View our latest analysis for Rackspace Technology

Above you can see how the current ROCE for Rackspace Technology 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 report for Rackspace Technology.

So How Is Rackspace Technology's ROCE Trending?

Things have been pretty stable at Rackspace Technology, with its capital employed and returns on that capital staying somewhat the same for the last four years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Rackspace Technology doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Rackspace Technology's ROCE

In a nutshell, Rackspace Technology has been trudging along with the same returns from the same amount of capital over the last four years. Moreover, since the stock has crumbled 77% over the last year, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Rackspace Technology that you might find interesting.

While Rackspace Technology 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. 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.