Return Trends At XXF Group Holdings (HKG:2473) Aren't Appealing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over XXF Group Holdings' (HKG:2473) trend of ROCE, we liked what we saw.

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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. The formula for this calculation on XXF Group Holdings is:

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

0.11 = CN¥215m ÷ (CN¥3.3b - CN¥1.3b) (Based on the trailing twelve months to December 2024).

Thus, XXF Group Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Specialty Retail industry.

View our latest analysis for XXF Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for XXF Group Holdings' ROCE against it's prior returns. If you're interested in investigating XXF Group Holdings' past further, check out this free graph covering XXF Group Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past four years, ROCE has remained relatively flat at around 11% and the business has deployed 88% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that XXF Group Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that XXF Group Holdings has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In the end, XXF Group Holdings has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 232% return they've received over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with XXF Group Holdings (including 1 which is a bit concerning) .

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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.