Xiaomi (HKG:1810) Has Some Way To Go To Become A Multi-Bagger

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Xiaomi (HKG:1810), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Xiaomi is:

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

0.079 = CN¥17b ÷ (CN¥327b - CN¥114b) (Based on the trailing twelve months to March 2024).

Therefore, Xiaomi has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Tech industry average of 6.6%.

See our latest analysis for Xiaomi

In the above chart we have measured Xiaomi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Xiaomi for free.

So How Is Xiaomi's ROCE Trending?

In terms of Xiaomi's historical ROCE trend, it doesn't exactly demand attention. The company has employed 143% more capital in the last five years, and the returns on that capital have remained stable at 7.9%. 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.

In Conclusion...

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 85% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Xiaomi could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 1810 on our platform quite valuable.

While Xiaomi isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.