Xiaomi (HKG:1810) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Xiaomi (HKG:1810) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Xiaomi is:

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

0.087 = CN¥19b ÷ (CN¥351b - CN¥129b) (Based on the trailing twelve months to September 2024).

Thus, Xiaomi has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Tech industry average of 6.0%.

See our latest analysis for Xiaomi

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Xiaomi .

What Does the ROCE Trend For Xiaomi Tell Us?

In terms of Xiaomi's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.7% for the last five years, and the capital employed within the business has risen 146% in that time. 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.

Our Take On Xiaomi's ROCE

As we've seen above, Xiaomi's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 203% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't 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.