We're Watching These Trends At Xiabuxiabu Catering Management (China) Holdings (HKG:520)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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.

Understanding Return On Capital Employed (ROCE)

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).

Therefore, Xiabuxiabu Catering Management (China) Holdings has an ROCE of 3.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.3%.

See 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 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. To be more specific, ROCE has fallen from 21% over the last five years. 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'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.

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

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. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 333% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Xiabuxiabu Catering Management (China) Holdings, we've discovered 1 warning sign that you should be aware of.

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.

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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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