X-Legend Entertainment (TWSE:4994) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, we've noticed some promising trends at X-Legend Entertainment (TWSE:4994) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on X-Legend Entertainment is:

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

0.11 = NT$138m ÷ (NT$1.7b - NT$455m) (Based on the trailing twelve months to December 2023).

Thus, X-Legend Entertainment has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

Check out our latest analysis for X-Legend Entertainment

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

So How Is X-Legend Entertainment's ROCE Trending?

X-Legend Entertainment has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 11% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by X-Legend Entertainment has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

What We Can Learn From X-Legend Entertainment's ROCE

As discussed above, X-Legend Entertainment appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 27% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know about the risks facing X-Legend Entertainment, we've discovered 2 warning signs that you should be aware of.

While X-Legend Entertainment 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.