Quest Resource Holding's (NASDAQ:QRHC) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Quest Resource Holding (NASDAQ:QRHC) and its trend of ROCE, we really liked what we saw.

What is 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 Quest Resource Holding is:

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

0.065 = US$5.8m ÷ (US$114m - US$24m) (Based on the trailing twelve months to September 2021).

So, Quest Resource Holding has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.9%.

View our latest analysis for Quest Resource Holding

Above you can see how the current ROCE for Quest Resource Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Quest Resource Holding's ROCE Trend?

The fact that Quest Resource Holding is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 6.5% on its capital. In addition to that, Quest Resource Holding is employing 23% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Quest Resource Holding has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Overall, Quest Resource Holding gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 211% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Quest Resource Holding does have some risks though, and we've spotted 2 warning signs for Quest Resource Holding that you might be interested in.

While Quest Resource Holding 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.

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.

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