Some Investors May Be Worried About Xilam Animation's (EPA:XIL) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Xilam Animation (EPA:XIL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Xilam Animation is:

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

0.077 = €8.5m ÷ (€164m - €53m) (Based on the trailing twelve months to June 2022).

Therefore, Xilam Animation has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 13%.

See our latest analysis for Xilam Animation

Above you can see how the current ROCE for Xilam Animation compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Xilam Animation.

So How Is Xilam Animation's ROCE Trending?

On the surface, the trend of ROCE at Xilam Animation doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Xilam Animation has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Xilam Animation's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xilam Animation is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 47% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Xilam Animation could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Xilam Animation may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.