Returns On Capital At Quickstep Holdings (ASX:QHL) Have Hit The Brakes

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Quickstep Holdings (ASX:QHL), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.088 = AU$3.8m ÷ (AU$62m - AU$18m) (Based on the trailing twelve months to December 2020).

Thus, Quickstep Holdings has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 7.8%.

See our latest analysis for Quickstep Holdings

In the above chart we have measured Quickstep Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Quickstep Holdings.

So How Is Quickstep Holdings' ROCE Trending?

There are better returns on capital out there than what we're seeing at Quickstep Holdings. The company has consistently earned 8.8% for the last five years, and the capital employed within the business has risen 42% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while Quickstep Holdings has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 61% in the last five years. Therefore based on the analysis done in this article, we don't think Quickstep Holdings has the makings of a multi-bagger.

If you'd like to know about the risks facing Quickstep Holdings, we've discovered 2 warning signs that you should be aware of.

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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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