Returns Are Gaining Momentum At Xponential Fitness (NYSE:XPOF)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Xponential Fitness' (NYSE:XPOF) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Xponential Fitness:

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

0.15 = US$56m ÷ (US$472m - US$94m) (Based on the trailing twelve months to September 2024).

So, Xponential Fitness has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Hospitality industry.

View our latest analysis for Xponential Fitness

Above you can see how the current ROCE for Xponential Fitness compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Xponential Fitness .

What The Trend Of ROCE Can Tell Us

Xponential Fitness has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 15% on its capital. In addition to that, Xponential Fitness is employing 43% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Long story short, we're delighted to see that Xponential Fitness' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 35% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Xponential Fitness does have some risks though, and we've spotted 1 warning sign for Xponential Fitness that you might be interested in.

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.