To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at XXF Group Holdings' (HKG:2473) ROCE trend, we were pretty happy with what we saw.

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 XXF Group Holdings is:

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

0.11 = CN¥206m ÷ (CN¥2.9b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Thus, XXF Group Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 8.8% it's much better.

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 XXF Group Holdings.

So How Is XXF Group Holdings' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 71% more capital in the last three years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that XXF Group Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, XXF Group Holdings has done well to reduce current liabilities to 37% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From XXF Group Holdings' ROCE

To sum it up, XXF Group Holdings has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 529% return over the last year, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing: We've identified 3 warning signs with XXF Group Holdings (at least 1 which can't be ignored) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.