There's Been No Shortage Of Growth Recently For XOX Berhad's (KLSE:XOX) Returns On Capital

Simply Wall St · 10/25 23:14

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in XOX Berhad's (KLSE:XOX) returns on capital, so let's have a look.

Understanding 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 XOX Berhad:

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

0.045 = RM9.1m ÷ (RM341m - RM140m) (Based on the trailing twelve months to June 2024).

Therefore, XOX Berhad has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 11%.

Check out our latest analysis for XOX Berhad

roce
KLSE:XOX Return on Capital Employed October 25th 2024

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of XOX Berhad.

The Trend Of ROCE

We're delighted to see that XOX Berhad is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 4.5% which is a sight for sore eyes. Not only that, but the company is utilizing 59% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From XOX Berhad's ROCE

To the delight of most shareholders, XOX Berhad has now broken into profitability. And since the stock has dived 83% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

XOX Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit concerning...

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.