Has Xiabuxiabu Catering Management (China) Holdings (HKG:520) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Xiabuxiabu Catering Management (China) Holdings (HKG:520) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Xiabuxiabu Catering Management (China) Holdings, this is the formula:

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

0.034 = CN¥122m ÷ (CN¥5.5b - CN¥1.9b) (Based on the trailing twelve months to June 2020).

So, Xiabuxiabu Catering Management (China) Holdings has an ROCE of 3.4%. In absolute terms, that's a low return but it's around the Hospitality industry average of 3.7%.

Check out our latest analysis for Xiabuxiabu Catering Management (China) Holdings

In the above chart we have measured Xiabuxiabu Catering Management (China) Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Xiabuxiabu Catering Management (China) Holdings.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Xiabuxiabu Catering Management (China) Holdings doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 3.4%. However it looks like Xiabuxiabu Catering Management (China) Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 35%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

In summary, Xiabuxiabu Catering Management (China) Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 381% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Xiabuxiabu Catering Management (China) Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Xiabuxiabu Catering Management (China) Holdings 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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