We Like These Underlying Return On Capital Trends At Xponential Fitness (NYSE:XPOF)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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, Xponential Fitness (NYSE:XPOF) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Xponential Fitness is:

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

0.082 = US$37m ÷ (US$551m - US$102m) (Based on the trailing twelve months to September 2023).

Therefore, Xponential Fitness has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Hospitality industry average of 9.1%.

Check out 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'd like, you can check out the forecasts from the analysts covering Xponential Fitness here for free.

So How Is Xponential Fitness' ROCE Trending?

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 four years ago but is is now generating 8.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Xponential Fitness is utilizing 70% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

Overall, Xponential Fitness gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 47% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Xponential Fitness does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

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.