Investors Will Want Quest Resource Holding's (NASDAQ:QRHC) Growth In ROCE To Persist
There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Quest Resource Holding (NASDAQ:QRHC) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Quest Resource Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = US$7.8m ÷ (US$182m - US$42m) (Based on the trailing twelve months to June 2022).
Thus, Quest Resource Holding has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.0%.
See our latest analysis for Quest Resource Holding
In the above chart we have measured Quest Resource Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Quest Resource Holding here for free.
What Can We Tell From Quest Resource Holding's ROCE Trend?
We're delighted to see that Quest Resource Holding is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.6% on its capital. Not only that, but the company is utilizing 99% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On Quest Resource Holding's ROCE
Overall, Quest Resource Holding gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 451% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, Quest Resource Holding does come with some risks, and we've found 1 warning sign that you should be aware of.
While Quest Resource Holding 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.
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