NetScout Systems (NASDAQ:NTCT) Shareholders Will Want The ROCE Trajectory To Continue

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in NetScout Systems' (NASDAQ:NTCT) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.022 = US$53m ÷ (US$2.8b - US$415m) (Based on the trailing twelve months to June 2022).

Therefore, NetScout Systems has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Communications industry average of 9.0%.

Check out 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 report on analyst forecasts for the company.

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 figures show that over the last five years, returns on capital have grown by 54%. The company is now earning US$0.02 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 20% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line

In summary, it's great to see that NetScout Systems has been able to turn things around and earn higher returns on lower amounts of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

While NetScout Systems looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NTCT is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.