XS Financial (CSE:XSF) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 XS Financial's (CSE:XSF) returns on capital, so let's have a look.

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 XS Financial:

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

0.021 = US$921k ÷ (US$72m - US$28m) (Based on the trailing twelve months to September 2022).

Thus, XS Financial has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 19%.

See 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 want to delve into the historical earnings, revenue and cash flow of XS Financial, check out these free graphs here.

So How Is XS Financial's ROCE Trending?

We're delighted to see that XS Financial is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 2.1% on its capital. And unsurprisingly, like most companies trying to break into the black, XS Financial is utilizing 985% 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.

The Bottom Line

Overall, XS Financial gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has dived 82% over the last three years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

XS Financial does have some risks though, and we've spotted 3 warning signs for XS Financial that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.