There Are Reasons To Feel Uneasy About Xiabuxiabu Catering Management (China) Holdings' (HKG:520) 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Xiabuxiabu Catering Management (China) Holdings (HKG:520), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Xiabuxiabu Catering Management (China) Holdings:

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

0.029 = CN¥111m ÷ (CN¥5.8b - CN¥2.0b) (Based on the trailing twelve months to December 2020).

So, Xiabuxiabu Catering Management (China) Holdings has an ROCE of 2.9%. On its own, that's a low figure but it's around the 2.5% average generated by the Hospitality industry.

View our latest analysis for Xiabuxiabu Catering Management (China) Holdings

Above you can see how the current ROCE for Xiabuxiabu Catering Management (China) Holdings 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 Xiabuxiabu Catering Management (China) Holdings.

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

In terms of Xiabuxiabu Catering Management (China) Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 2.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.9%. 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.

The Bottom Line On Xiabuxiabu Catering Management (China) Holdings' ROCE

To conclude, we've found that Xiabuxiabu Catering Management (China) Holdings is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 127% 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.

On a separate note, we've found 4 warning signs for Xiabuxiabu Catering Management (China) Holdings you'll probably want to know about.

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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