XP Factory (LON:XPF) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at XP Factory (LON:XPF) and its trend of ROCE, we really liked what we saw.

We've discovered 1 warning sign about XP Factory. View them for free.

What Is 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. The formula for this calculation on XP Factory is:

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

0.031 = UK£1.8m ÷ (UK£73m - UK£17m) (Based on the trailing twelve months to March 2024).

So, XP Factory has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.9%.

View our latest analysis for XP Factory

In the above chart we have measured XP Factory's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for XP Factory .

How Are Returns Trending?

The fact that XP Factory is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 3.1% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, XP Factory is utilizing 306% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 23% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

Overall, XP Factory 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 with a respectable 79% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing XP Factory that you might find interesting.

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.