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Netflix's (NASDAQ:NFLX) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Netflix's (NASDAQ:NFLX) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Netflix is:

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

0.17 = US$7.0b ÷ (US$49b - US$8.9b) (Based on the trailing twelve months to December 2023).

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So, Netflix has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Entertainment industry.

See our latest analysis for Netflix

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In the above chart we have measured Netflix's 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 Netflix .

How Are Returns Trending?

The trends we've noticed at Netflix are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 105%. So we're very much inspired by what we're seeing at Netflix thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that Netflix can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 77% 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While Netflix looks impressive, no company is worth an infinite price. The intrinsic value infographic for NFLX helps visualize whether it is currently trading for a fair price.

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.