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. 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. With that in mind, the ROCE of Nextracker (NASDAQ:NXT) looks attractive right now, so lets see what the trend of returns can tell us.

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. Analysts use this formula to calculate it for Nextracker:

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

0.35 = US$719m ÷ (US$3.0b - US$905m) (Based on the trailing twelve months to December 2024).

So, Nextracker has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Electrical industry average of 11%.

Check out our latest analysis for Nextracker

In the above chart we have measured Nextracker's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nextracker .

What Can We Tell From Nextracker's ROCE Trend?

In terms of Nextracker's history of ROCE, it's quite impressive. The company has employed 626% more capital in the last five years, and the returns on that capital have remained stable at 35%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Nextracker can keep this up, we'd be very optimistic about its future.

On a side note, Nextracker has done well to reduce current liabilities to 30% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Nextracker's ROCE

In summary, we're delighted to see that Nextracker has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Yet over the last year the stock has declined 23%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Like most companies, Nextracker does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.