The Returns At Xilam Animation (EPA:XIL) Provide Us With Signs Of What's To Come

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. 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.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Xilam Animation:

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

0.084 = €7.7m ÷ (€125m - €33m) (Based on the trailing twelve months to June 2020).

Therefore, Xilam Animation has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 6.4% generated by the Entertainment industry, it's much better.

See our latest analysis for Xilam Animation

In the above chart we have measured Xilam Animation's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Xilam Animation here for free.

The Trend Of ROCE

In terms of Xilam Animation's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.4% from 12% five years ago. 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 26% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From 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. And the stock has done incredibly well with a 2,128% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Xilam Animation it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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. 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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