Here's What To Make Of XLMedia's (LON:XLM) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at XLMedia (LON:XLM) and its ROCE trend, we weren't exactly thrilled.

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 XLMedia, this is the formula:

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

0.19 = US$14m ÷ (US$95m - US$24m) (Based on the trailing twelve months to June 2020).

So, XLMedia has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Interactive Media and Services industry average of 5.5% it's much better.

See our latest analysis for XLMedia

Above you can see how the current ROCE for XLMedia 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 XLMedia.

The Trend Of ROCE

Things have been pretty stable at XLMedia, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if XLMedia doesn't end up being a multi-bagger in a few years time. This probably explains why XLMedia is paying out 50% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

What We Can Learn From XLMedia's ROCE

We can conclude that in regards to XLMedia's returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think XLMedia has the makings of a multi-bagger.

If you want to know some of the risks facing XLMedia we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While XLMedia 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. 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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