Returns On Capital Are Showing Encouraging Signs At XMH Holdings (SGX:BQF)

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. 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. So on that note, XMH Holdings (SGX:BQF) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on XMH Holdings is:

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

0.041 = S$3.6m ÷ (S$132m - S$42m) (Based on the trailing twelve months to April 2022).

Therefore, XMH Holdings has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.7%.

Check out the opportunities and risks within the SG Trade Distributors industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of XMH Holdings, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that XMH Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 4.1% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by XMH Holdings has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On XMH Holdings' ROCE

To sum it up, XMH Holdings is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 5.0% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing: We've identified 3 warning signs with XMH Holdings (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While XMH Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.