Investors Will Want NetScout Systems' (NASDAQ:NTCT) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, NetScout Systems (NASDAQ:NTCT) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for NetScout Systems:

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

0.026 = US$44m ÷ (US$2.1b - US$383m) (Based on the trailing twelve months to June 2024).

Thus, NetScout Systems has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Communications industry average of 9.2%.

View our latest analysis for NetScout Systems

In the above chart we have measured NetScout Systems' 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 analyst report for NetScout Systems .

The Trend Of ROCE

While the ROCE is still rather low for NetScout Systems, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 792% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 40% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On NetScout Systems' ROCE

In a nutshell, we're pleased to see that NetScout Systems has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

NetScout Systems does have some risks though, and we've spotted 1 warning sign for NetScout Systems that you might be interested in.

While NetScout Systems 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.