Nuix's (ASX:NXL) Returns on Capital and Growth Outlook

October 11, 2024 06:13 PM AEDT | By Team Kalkine Media

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Highlights

Nuix's Return on Capital Employed (ROCE) has decreased over the past five years.

The current ROCE is 4.6%, below the software industry average of 9.8%.

Nuix has been reinvesting for growth, resulting in increased sales and capital employed.

Nuix Limited (ASX:NXL), a software company, has shown some concerning trends regarding its Return on Capital Employed (ROCE). ROCE is a key indicator of how well a company uses its capital to generate profits. It is calculated using the formula:

ROCE = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

For Nuix, this amounts to a return of 4.6%, based on its EBIT of AU$14 million and total assets minus liabilities of AU$313 million. This 4.6% ROCE is well below the software industry average of 9.8%, indicating that the company is not performing at an optimal level in terms of capital efficiency.

Historical Trends and Growth Investments

Looking at historical data, Nuix’s ROCE was at 10% five years ago, which has since dropped to 4.6%. Despite this decline in returns, the company has been reinvesting capital and pursuing growth. Both capital employed and revenue have increased, which suggests that Nuix is focusing on long-term growth over short-term returns.

If these investments begin to pay off, the company could see an improvement in overall performance, even if current returns are lower than they were in the past. This strategy of reinvestment may result in better future outcomes for the company, although short-term returns have been impacted.

Positive Stock Performance Despite Lower ROCE

Interestingly, despite the declining ROCE, Nuix has delivered a strong stock performance over the last three years, with a 173% return. This suggests that market participants may be optimistic about the company’s future, driven by its increased sales and growth investments.

While the current trends in ROCE might not align with a company poised for significant gains in the immediate future, Nuix’s reinvestment into growth could position the business well in the longer term.

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