Yahoo Finance NetScout Systems (NASDAQ:NTCT) Is Experiencing Growth In Returns On Capital
There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for NetScout Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = US$59m ÷ (US$2.6b - US$395m) (Based on the trailing twelve months to March 2024).
Therefore, NetScout Systems has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Communications industry average of 8.1%.
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 .
How Are Returns Trending?
Like most people, we're pleased that NetScout Systems is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.7% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 24% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. NetScout Systems could be selling under-performing assets since the ROCE is improving.
The Bottom Line
In a nutshell, we're pleased to see that NetScout Systems has been able to generate higher returns from less capital. Given the stock has declined 27% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for NTCT on our platform that is definitely worth checking out.
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.
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