If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we’re seeing at Q Technology (Group)’s (HKG:1478) look very promising so lets take a look.
What Is 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 Q Technology (Group), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = CN¥1.1b ÷ (CN¥13b – CN¥8.1b) (Based on the trailing twelve months to December 2021).
Therefore, Q Technology (Group) has an ROCE of 22%. In absolute terms that’s a great return and it’s even better than the Consumer Durables industry average of 12%.
View our latest analysis for Q Technology (Group)
In the above chart we have measured Q Technology (Group)’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Q Technology (Group)’s ROCE Trending?
We like the trends that we’re seeing from Q Technology (Group). The data shows that returns on capital have increased substantially over the last five years to 22%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 214%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
Another thing to note, Q Technology (Group) has a high ratio of current liabilities to total assets of 62%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
All in all, it’s terrific to see that Q Technology (Group) is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 67% over the last five years, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.