There are a few key trends to look for if we want to identify the next multi-bagger. 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, XL Holdings Berhad (KLSE:XL) looks quite promising in regards to its trends of return on capital.
What Is 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. The formula for this calculation on XL Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = RM2.2m ÷ (RM146m - RM16m) (Based on the trailing twelve months to July 2022).
So, XL Holdings Berhad has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for XL Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating XL Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that XL Holdings Berhad is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, XL Holdings Berhad is utilizing 199% more capital than it was five years ago. 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.
The Key Takeaway
In summary, it's great to see that XL Holdings Berhad has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
XL Holdings Berhad does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.
While XL Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here