Investors Will Want Quorum Information Technologies' (CVE:QIS) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Quorum Information Technologies (CVE:QIS) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Quorum Information Technologies is:

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

0.024 = CA$1.1m ÷ (CA$47m - CA$3.2m) (Based on the trailing twelve months to March 2023).

Therefore, Quorum Information Technologies has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 8.9%.

Check out our latest analysis for Quorum Information Technologies

Above you can see how the current ROCE for Quorum Information Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Quorum Information Technologies here for free.

What Does the ROCE Trend For Quorum Information Technologies Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 121% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Quorum Information Technologies' ROCE

All in all, it's terrific to see that Quorum Information Technologies is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 1.8% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Quorum Information Technologies does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.