Is Xchanging Solutions (NSE:XCHANGING) A Future Multi-bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So when we looked at Xchanging Solutions (NSE:XCHANGING) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Xchanging Solutions, this is the formula:

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

0.098 = ₹492m ÷ (₹5.7b - ₹723m) (Based on the trailing twelve months to June 2020).

Therefore, Xchanging Solutions has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

See our latest analysis for Xchanging Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xchanging Solutions' ROCE against it's prior returns. If you're interested in investigating Xchanging Solutions' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Xchanging Solutions' ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 57% more capital is being employed now too. So we're very much inspired by what we're seeing at Xchanging Solutions thanks to its ability to profitably reinvest capital.

Our Take On Xchanging Solutions' ROCE

All in all, it's terrific to see that Xchanging Solutions is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 201% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

While Xchanging Solutions 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. 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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