Xunlei's (NASDAQ:XNET) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Xunlei (NASDAQ:XNET) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Xunlei is:

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

0.014 = US$5.1m ÷ (US$472m - US$119m) (Based on the trailing twelve months to September 2024).

So, Xunlei has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Software industry average of 8.8%.

Check out 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'd like to look at how Xunlei has performed in the past in other metrics, you can view this free graph of Xunlei's past earnings, revenue and cash flow.

What Can We Tell From Xunlei's ROCE Trend?

We're delighted to see that Xunlei is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.4%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. Because in the end, a business can only get so efficient.

The Bottom Line On Xunlei's ROCE

As discussed above, Xunlei appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 64% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

While Xunlei looks impressive, no company is worth an infinite price. The intrinsic value infographic for XNET helps visualize whether it is currently trading for a fair price.

While Xunlei 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.