XS Financial (CSE:XSF) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in XS Financial's (CSE:XSF) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for XS Financial, this is the formula:

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

0.014 = US$623k ÷ (US$56m - US$11m) (Based on the trailing twelve months to June 2022).

Thus, XS Financial has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 19%.

View our latest analysis for XS Financial

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

What Can We Tell From XS Financial's ROCE Trend?

XS Financial has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 1.4% on its capital. And unsurprisingly, like most companies trying to break into the black, XS Financial is utilizing 1,087% more capital than it was four years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On XS Financial's ROCE

Long story short, we're delighted to see that XS Financial's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 70% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with XS Financial and understanding these should be part of your investment process.

While XS Financial 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.