We Like These Underlying Return On Capital Trends At Quest Resource Holding (NASDAQ:QRHC)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Quest Resource Holding (NASDAQ:QRHC) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Quest Resource Holding, this is the formula:

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

0.041 = US$5.7m ÷ (US$183m - US$44m) (Based on the trailing twelve months to March 2022).

So, Quest Resource Holding has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.5%.

Check out our latest analysis for Quest Resource Holding

In the above chart we have measured Quest Resource Holding'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 Quest Resource Holding here for free.

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

We're delighted to see that Quest Resource Holding is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 4.1% which is a sight for sore eyes. Not only that, but the company is utilizing 89% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Quest Resource Holding's ROCE

In summary, it's great to see that Quest Resource Holding has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 46% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 2 warning signs for Quest Resource Holding you'll probably want to know about.

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.

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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.