Investors Could Be Concerned With IQUEST's (KOSDAQ:262840) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating IQUEST (KOSDAQ:262840), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on IQUEST is:

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

0.052 = ₩3.0b ÷ (₩63b - ₩5.7b) (Based on the trailing twelve months to March 2024).

Thus, IQUEST has an ROCE of 5.2%. On its own, that's a low figure but it's around the 6.1% average generated by the Software industry.

See our latest analysis for IQUEST

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 IQUEST has performed in the past in other metrics, you can view this free graph of IQUEST's past earnings, revenue and cash flow.

So How Is IQUEST's ROCE Trending?

We weren't thrilled with the trend because IQUEST's ROCE has reduced by 75% over the last five years, while the business employed 307% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with IQUEST's earnings and if they change as a result from the capital raise.

On a related note, IQUEST has decreased its current liabilities to 9.1% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On IQUEST's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that IQUEST is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 69% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing IQUEST we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While IQUEST 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com