The Returns On Capital At Quickstep Holdings (ASX:QHL) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Quickstep Holdings (ASX:QHL), we weren't too upbeat about how things were going.

What Is 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 Quickstep Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.032 = AU$957k ÷ (AU$74m - AU$44m) (Based on the trailing twelve months to June 2024).

So, Quickstep Holdings has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.4%.

View our latest analysis for Quickstep Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Quickstep Holdings' ROCE against it's prior returns. If you'd like to look at how Quickstep Holdings has performed in the past in other metrics, you can view this free graph of Quickstep Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Quickstep Holdings, given the returns are trending downwards. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Quickstep Holdings to turn into a multi-bagger.

On a side note, Quickstep Holdings' current liabilities have increased over the last five years to 60% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Quickstep Holdings' ROCE

In summary, it's unfortunate that Quickstep Holdings is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 73% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Quickstep Holdings we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

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. 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.