What Do The Returns On Capital At Quixant (LON:QXT) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Quixant (LON:QXT) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Quixant:

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

0.055 = US$3.5m ÷ (US$80m - US$15m) (Based on the trailing twelve months to June 2020).

So, Quixant has an ROCE of 5.5%. On its own, that's a low figure but it's around the 5.5% average generated by the Hospitality industry.

View our latest analysis for Quixant

In the above chart we have measured Quixant's 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 Quixant here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Quixant doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.5% from 32% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Quixant's ROCE

In summary, we're somewhat concerned by Quixant's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Quixant and understanding this should be part of your investment process.

While Quixant 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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