Xunlei (NASDAQ:XNET) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at Xunlei (NASDAQ:XNET) so let's look a bit deeper.

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

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. To calculate this metric for Xunlei, this is the formula:

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

0.022 = US$7.2m ÷ (US$458m - US$122m) (Based on the trailing twelve months to June 2023).

Thus, Xunlei has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Software industry average of 8.9%.

View our latest analysis for Xunlei

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xunlei's ROCE against it's prior returns. If you're interested in investigating Xunlei's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Xunlei's ROCE Trending?

Shareholders will be relieved that Xunlei has broken into profitability. The company now earns 2.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Xunlei 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To bring it all together, Xunlei has done well to increase the returns it's generating from its capital employed. However the stock is down a substantial 74% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to continue researching Xunlei, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.