Returns On Capital At Quickstep Holdings (ASX:QHL) Have Stalled

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Quickstep Holdings (ASX:QHL), it didn't seem to tick all of these boxes.

Understanding 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 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).

Therefore, 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 7.7%.

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, you can check out the forecasts from the analysts covering Quickstep Holdings here for free.

How Are Returns Trending?

The returns on capital haven't changed much for Quickstep Holdings in recent years. 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.

Our Take On Quickstep Holdings' ROCE

As we've seen above, Quickstep Holdings' returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 56% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Quickstep Holdings, we've discovered 1 warning sign that you should be aware of.

While Quickstep Holdings 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. 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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