These Return Metrics Don't Make Rackspace Technology (NASDAQ:RXT) Look Too Strong

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Rackspace Technology (NASDAQ:RXT), so let's see why.

Understanding Return On Capital Employed (ROCE)

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 Rackspace Technology:

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

0.013 = US$52m ÷ (US$4.8b - US$791m) (Based on the trailing twelve months to March 2023).

So, Rackspace Technology has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the IT industry average of 14%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Rackspace Technology

What Can We Tell From Rackspace Technology's ROCE Trend?

The trend of ROCE at Rackspace Technology is showing some signs of weakness. Unfortunately, returns have declined substantially over the last four years to the 1.3% we see today. On top of that, the business is utilizing 29% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last year have experienced a 62% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Rackspace Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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. 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.