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What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Quickstep Holdings (ASX:QHL) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Quickstep Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = AU$4.2m ÷ (AU$62m - AU$18m) (Based on the trailing twelve months to December 2019).
So, Quickstep Holdings has an ROCE of 9.6%. On its own, that's a low figure but it's around the 9.1% average generated by the Aerospace & Defense industry.
Above you can see how the current ROCE for Quickstep Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We're delighted to see that Quickstep Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 9.6% on its capital. Not only that, but the company is utilizing 259% more capital than before, but that's to be expected from a company trying to break into profitability. 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.
On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Quickstep Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Quickstep Holdings' ROCE
In summary, it's great to see that Quickstep Holdings has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 59% in the last five years, there could be a chance of a good investment here if the valuation makes sense. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One final note, you should learn about the 4 warning signs we've spotted with Quickstep Holdings (including 2 which is shouldn't be ignored) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. 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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