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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for XPEL (NASDAQ:XPEL), we aren't jumping out of our chairs because returns are decreasing.
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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. To calculate this metric for XPEL, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$59m ÷ (US$286m - US$42m) (Based on the trailing twelve months to December 2024).
Therefore, XPEL has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 11%.
View our latest analysis for XPEL
Above you can see how the current ROCE for XPEL compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for XPEL .
What The Trend Of ROCE Can Tell Us
In terms of XPEL's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 43%, but they have dropped over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On XPEL's ROCE
Bringing it all together, while we're somewhat encouraged by XPEL's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 119% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.