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

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at XiDeLang Holdings (KLSE:XDL), it didn't seem to tick all of these boxes.

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 XiDeLang Holdings, this is the formula:

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).

Thus, XiDeLang Holdings has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.6%.

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're interested in investigating XiDeLang Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For XiDeLang Holdings Tell Us?

There hasn't been much to report for XiDeLang Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. 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 Key Takeaway

In summary, XiDeLang Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 29% 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 final note, you should learn about the 5 warning signs we've spotted with XiDeLang Holdings (including 1 which is potentially serious) .

While XiDeLang Holdings 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.
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