Xponential Fitness (NYSE:XPOF) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Xponential Fitness (NYSE:XPOF) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Xponential Fitness:

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

0.048 = US$19m ÷ (US$472m - US$81m) (Based on the trailing twelve months to September 2022).

So, Xponential Fitness has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 11%.

Check out our latest analysis for Xponential Fitness

In the above chart we have measured Xponential Fitness' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Xponential Fitness here for free.

What Can We Tell From Xponential Fitness' ROCE Trend?

The fact that Xponential Fitness is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 4.8% on its capital. Not only that, but the company is utilizing 48% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Xponential Fitness' ROCE

To the delight of most shareholders, Xponential Fitness has now broken into profitability. Since the stock has returned a solid 50% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Xponential Fitness can keep these trends up, it could have a bright future ahead.

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.