There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at Quorum Information Technologies (CVE:QIS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Quorum Information Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0073 = CA$334k ÷ (CA$50m - CA$4.2m) (Based on the trailing twelve months to March 2021).
Thus, Quorum Information Technologies has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.
In the above chart we have measured Quorum Information Technologies' 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 Quorum Information Technologies.
What Does the ROCE Trend For Quorum Information Technologies Tell Us?
On the surface, the trend of ROCE at Quorum Information Technologies doesn't inspire confidence. Around five years ago the returns on capital were 4.4%, but since then they've fallen to 0.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In summary, Quorum Information Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 108% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we found 2 warning signs for Quorum Information Technologies (1 is potentially serious) you should be aware of.
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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