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# Understanding Your Return On Investment In Xtep International Holdings Limited (HKG:1368)

This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Xtep International Holdings Limited (HKG:1368) stock.

Buying Xtep International Holdings makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Xtep International Holdings’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

### Xtep International Holdings’s Return On Capital Employed

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Xtep International Holdings is good at growing investor capital. I have calculated Xtep International Holdings’s ROCE for you below:

ROCE Calculation for 1368

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥875m ÷ (CN¥9.4b – CN¥3.1b) = 14%

1368’s 14% ROCE means that for every HK\$100 you invest, the company creates HK\$13.8. Comparing this to a healthy 15% benchmark shows Xtep International Holdings is currently unable to return a desired amount to owners for the use of their capital, which isn’t favourable for investors who have forgone other potentially solid companies.

### What is causing this?

Although Xtep International Holdings is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Because of this, it is important to look beyond the final value of 1368’s ROCE and understand what is happening to the individual components. Three years ago, 1368’s ROCE was 16%, which means the company’s capital returns have worsened. Conversely, the movement in the earnings variable shows a jump from CN¥846m to CN¥875m albeit capital employed has improved by a relatively larger volume because of an increase in total assets , which means that although earnings have increased, 1368 requires more capital to produce each HK\$1 of earnings.

### Next Steps

ROCE for 1368 investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. Xtep International Holdings’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for 1368’s future growth? Take a look at our free research report of analyst consensus for 1368’s outlook.
2. Valuation: What is 1368 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 1368 is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.