Returns At NetScout Systems (NASDAQ:NTCT) Are On The Way Up
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in NetScout Systems' (NASDAQ:NTCT) returns on capital, so let's have a look.
What Is 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. Analysts use this formula to calculate it for NetScout Systems:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$80m ÷ (US$2.8b - US$454m) (Based on the trailing twelve months to March 2023).
Thus, NetScout Systems has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 9.9%.
See our latest analysis for NetScout Systems
Above you can see how the current ROCE for NetScout Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering NetScout Systems here for free.
How Are Returns Trending?
While there are companies with higher returns on capital out there, we still find the trend at NetScout Systems promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 7,053% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
As discussed above, NetScout Systems appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
While NetScout Systems looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NTCT is currently trading for a fair price.
While NetScout Systems 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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