Some Investors May Be Worried About Rackspace Technology's (NASDAQ:RXT) Returns On Capital
When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Rackspace Technology (NASDAQ:RXT) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Rackspace Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = US$52m ÷ (US$4.8b - US$791m) (Based on the trailing twelve months to March 2023).
So, Rackspace Technology has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the IT industry average of 14%.
Check out 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.
So How Is Rackspace Technology's ROCE Trending?
We are a bit anxious about the trends of ROCE at Rackspace Technology. The company used to generate 2.7% on its capital four years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 29% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Key Takeaway
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 80% in the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Rackspace Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...
While Rackspace Technology isn't earning the highest return, check out this free list of companies that are 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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