Under The Bonnet, AsiaQuest's (TSE:4261) Returns Look Impressive

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, the ROCE of AsiaQuest (TSE:4261) looks great, so lets see what the trend can tell us.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AsiaQuest, this is the formula:

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

0.28 = JP¥487m ÷ (JP¥2.5b - JP¥722m) (Based on the trailing twelve months to September 2024).

Thus, AsiaQuest has an ROCE of 28%. In absolute terms that's a great return and it's even better than the IT industry average of 16%.

View our latest analysis for AsiaQuest

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how AsiaQuest has performed in the past in other metrics, you can view this free graph of AsiaQuest's past earnings, revenue and cash flow.

What Does the ROCE Trend For AsiaQuest Tell Us?

AsiaQuest is displaying some positive trends. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 28%. Basically the business is earning more per dollar of capital invested and in addition to that, 153% 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To sum it up, AsiaQuest has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 42% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching AsiaQuest, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.