There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Rackspace Technology (NASDAQ:RXT) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)
0.038 = US$211m ÷ (US$6.4b - US$846m) (Based on the trailing twelve months to September 2021).
Therefore, Rackspace Technology has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.
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.
How Are Returns Trending?
While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. The figures show that over the last two years, ROCE has grown 24% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Rackspace Technology's ROCE
To bring it all together, Rackspace Technology has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 16% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, Rackspace Technology does come with some risks, and we've found 2 warning signs that you should be aware of.
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.
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.
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