There Are Reasons To Feel Uneasy About Quorum Information Technologies' (CVE:QIS) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Quorum Information Technologies (CVE:QIS), we don't think it's current trends fit the mold of a multi-bagger.

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

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

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

0.0038 = CA$171k ÷ (CA$48m - CA$3.9m) (Based on the trailing twelve months to June 2022).

Therefore, Quorum Information Technologies has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Software industry average of 8.1%.

See our latest analysis for Quorum Information Technologies

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, you can check out the forecasts from the analysts covering Quorum Information Technologies here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Quorum Information Technologies, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.0% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Quorum Information Technologies' ROCE

While returns have fallen for Quorum Information Technologies in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 12% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Quorum Information Technologies does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Quorum Information Technologies 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.