Returns On Capital At XiDeLang Holdings (KLSE:XDL) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think XiDeLang Holdings (KLSE:XDL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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 XiDeLang Holdings:

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

0.027 = CN¥39m ÷ (CN¥1.5b - CN¥79m) (Based on the trailing twelve months to June 2020).

Therefore, XiDeLang Holdings has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.3%.

Check out our latest analysis for XiDeLang Holdings

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

What Can We Tell From XiDeLang Holdings' ROCE Trend?

Over the past five years, XiDeLang Holdings' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect XiDeLang Holdings to be a multi-bagger going forward.

The Bottom Line On XiDeLang Holdings' ROCE

In a nutshell, XiDeLang Holdings has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 4 warning signs with XiDeLang Holdings and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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