Returns On Capital At Rackspace Technology (NASDAQ:RXT) Have Stalled

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after investigating Rackspace Technology (NASDAQ:RXT), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Rackspace Technology is:

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

0.029 = US$165m ÷ (US$6.4b - US$758m) (Based on the trailing twelve months to March 2021).

Therefore, Rackspace Technology has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

View our latest analysis for Rackspace Technology

In the above chart we have measured Rackspace Technology'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 Rackspace Technology here for free.

What Does the ROCE Trend For Rackspace Technology Tell Us?

Things have been pretty stable at Rackspace Technology, with its capital employed and returns on that capital staying somewhat the same for the last two years. This tells us the company isn't reinvesting in itself, so it's plausible that it's 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.

The Bottom Line On 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 two years. Since the stock has gained an impressive 12% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Rackspace Technology does have some risks though, and we've spotted 4 warning signs for Rackspace Technology that you might be interested in.

While Rackspace Technology 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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