Returns Are Gaining Momentum At Xponential Fitness (NYSE:XPOF)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Xponential Fitness (NYSE:XPOF) and its trend of ROCE, we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Xponential Fitness:

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

0.12 = US$45m ÷ (US$475m – US$92m) (Based on the trailing twelve months to June 2024).

So, Xponential Fitness has an ROCE of 12%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Hospitality industry average of 11%.

See our latest analysis for Xponential Fitness

Above you can see how the current ROCE for Xponential Fitness compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Xponential Fitness for free.

So How Is Xponential Fitness’ ROCE Trending?

Xponential Fitness has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 12% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Xponential Fitness is utilizing 47% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Xponential Fitness’ ROCE

Long story short, we’re delighted to see that Xponential Fitness’ reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 21% to its stockholders over the last three 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.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for Xponential Fitness (of which 3 shouldn’t be ignored!) that you should know about.

While Xponential Fitness may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.