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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Netflix (NASDAQ:NFLX) and its trend of ROCE, we really liked what we saw.
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 Netflix, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$5.7b ÷ (US$48b - US$7.8b) (Based on the trailing twelve months to September 2022).
Therefore, Netflix has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Entertainment industry.
In the above chart we have measured Netflix'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 Netflix here for free.
The Trend Of ROCE
We like the trends that we're seeing from Netflix. The data shows that returns on capital have increased substantially over the last five years to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 241% more capital is being employed now too. So we're very much inspired by what we're seeing at Netflix thanks to its ability to profitably reinvest capital.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 16%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Key Takeaway
To sum it up, Netflix has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 65% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
While Netflix isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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