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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating XL Holdings Berhad (KLSE:XL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.047 = RM7.2m ÷ (RM156m - RM2.7m) (Based on the trailing twelve months to July 2023).

So, XL Holdings Berhad has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

View our latest analysis for XL Holdings Berhad

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

What Can We Tell From XL Holdings Berhad's ROCE Trend?

There are better returns on capital out there than what we're seeing at XL Holdings Berhad. Over the past five years, ROCE has remained relatively flat at around 4.7% and the business has deployed 219% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

Long story short, while XL Holdings Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 2 warning signs with XL Holdings Berhad and understanding these should be part of your investment process.