Yahoo Finance Investors Met With Slowing Returns on Capital At Rackspace Technology (NASDAQ:RXT)
If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Rackspace Technology (NASDAQ:RXT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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)
0.032 = US$154m ÷ (US$5.7b - US$826m) (Based on the trailing twelve months to September 2022).
Thus, Rackspace Technology has an ROCE of 3.2%. In absolute terms, that's a low return and it also 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 three years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Rackspace Technology doesn't end up being a multi-bagger in a few years time.
The Key Takeaway
In a nutshell, Rackspace Technology has been trudging along with the same returns from the same amount of capital over the last three years. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 81% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One final note, you should learn about the 2 warning signs we've spotted with Rackspace Technology (including 1 which makes us a bit uncomfortable) .
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
