Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Xiaomi (HKG:1810), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 Xiaomi:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = CN¥17b ÷ (CN¥290b - CN¥114b) (Based on the trailing twelve months to March 2022).
Therefore, Xiaomi has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Tech industry average of 9.3%.
Above you can see how the current ROCE for Xiaomi compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Xiaomi here for free.
So How Is Xiaomi's ROCE Trending?
The returns on capital haven't changed much for Xiaomi in recent years. The company has employed 503% more capital in the last five years, and the returns on that capital have remained stable at 9.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 39% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line On Xiaomi's ROCE
In conclusion, Xiaomi has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 33% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we found 2 warning signs for Xiaomi (1 is concerning) you should be aware of.
While Xiaomi 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.
Valuation is complex, but we're helping make it simple.
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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.
Xiaomi Corporation, an investment holding company, provides hardware, software, and internet services in Mainland China, India, Europe, and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet with moderate growth potential.