Nagarro (FRA:NA9) Is Very Good At Capital Allocation
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Nagarro's (FRA:NA9) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Nagarro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = €96m ÷ (€664m - €198m) (Based on the trailing twelve months to September 2022).
So, Nagarro has an ROCE of 20%. In absolute terms that's a great return and it's even better than the IT industry average of 11%.
See our latest analysis for Nagarro
Above you can see how the current ROCE for Nagarro compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nagarro.
How Are Returns Trending?
We like the trends that we're seeing from Nagarro. Over the last four years, returns on capital employed have risen substantially to 20%. 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 240%. So we're very much inspired by what we're seeing at Nagarro 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 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Nagarro has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Nagarro has. And since the stock has fallen 36% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, Nagarro does come with some risks, and we've found 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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