The Returns On Capital At Xiabuxiabu Catering Management (China) Holdings (HKG:520) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Xiabuxiabu Catering Management (China) Holdings (HKG:520) 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. 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)

0.11 = CN¥391m ÷ (CN¥5.3b - CN¥1.8b) (Based on the trailing twelve months to June 2021).

Thus, Xiabuxiabu Catering Management (China) Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 2.7% generated by the Hospitality industry.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Xiabuxiabu Catering Management (China) Holdings' ROCE Trend?

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 18%, but since then they've fallen to 11%. 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 side note, Xiabuxiabu Catering Management (China) Holdings' current liabilities have increased over the last five years to 34% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 11%. 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.

Our Take On Xiabuxiabu Catering Management (China) Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xiabuxiabu Catering Management (China) Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 5.6% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you're still interested in Xiabuxiabu Catering Management (China) Holdings it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Xiabuxiabu Catering Management (China) Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.