Returns At Xunlei (NASDAQ:XNET) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Xunlei's (NASDAQ:XNET) returns on capital, so let's have a look.

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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. To calculate this metric for Xunlei, this is the formula:

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

0.015 = US$5.0m ÷ (US$474m - US$127m) (Based on the trailing twelve months to December 2024).

Thus, Xunlei has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Software industry average of 9.7%.

See our latest analysis for Xunlei

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xunlei's ROCE against it's prior returns. If you'd like to look at how Xunlei has performed in the past in other metrics, you can view this free graph of Xunlei's past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Xunlei has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.5% on its capital. While returns have increased, the amount of capital employed by Xunlei has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

To sum it up, Xunlei is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 2.3% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 3 warning signs for Xunlei you'll probably want to know about.

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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.