Stock Analysis

Does QAF's (SGX:Q01) Returns On Capital Reflect Well On The Business?

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SGX:Q01
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What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within QAF (SGX:Q01), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on QAF is:

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

0.08 = S$47m ÷ (S$868m - S$276m) (Based on the trailing twelve months to December 2020).

So, QAF has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.

View our latest analysis for QAF

roce
SGX:Q01 Return on Capital Employed March 15th 2021

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

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at QAF. Unfortunately the returns on capital have diminished from the 14% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect QAF to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that QAF is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 19% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

QAF does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While QAF 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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