If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in XD's (HKG:2400) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on XD is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥465m ÷ (CN¥3.1b - CN¥538m) (Based on the trailing twelve months to June 2020).
So, XD has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Entertainment industry.
See our latest analysis for XD
In the above chart we have measured XD's 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 XD.
What Can We Tell From XD's ROCE Trend?
We like the trends that we're seeing from XD. Over the last three years, returns on capital employed have risen substantially to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 237%. So we're very much inspired by what we're seeing at XD thanks to its ability to profitably reinvest capital.
In Conclusion...
All in all, it's terrific to see that XD is reaping the rewards from prior investments and is growing its capital base. And a remarkable 191% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if XD can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing XD, we've discovered 1 warning sign that you should be aware of.
While XD 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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About SEHK:2400
XD
An investment holding company, develops, publishes, operates, and distributes mobile and web games in Mainland China and internationally.
High growth potential with excellent balance sheet.
