Returns At Xchanging Solutions (NSE:XCHANGING) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Xchanging Solutions' (NSE:XCHANGING) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Xchanging Solutions, this is the formula:

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

0.087 = ₹517m ÷ (₹6.4b - ₹513m) (Based on the trailing twelve months to December 2021).

Thus, Xchanging Solutions has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the IT industry average of 13%.

See our latest analysis for Xchanging Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xchanging Solutions' ROCE against it's prior returns. If you'd like to look at how Xchanging Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 70% more capital is being employed now too. So we're very much inspired by what we're seeing at Xchanging Solutions thanks to its ability to profitably reinvest capital.

One more thing to note, Xchanging Solutions has decreased current liabilities to 8.0% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Xchanging Solutions' ROCE

In summary, it's great to see that Xchanging Solutions can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 81% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Xchanging Solutions does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.