Investors Met With Slowing Returns on Capital At QuantaSing Group (NASDAQ:QSG)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at QuantaSing Group (NASDAQ:QSG), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for QuantaSing Group:

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

0.076 = CN¥24m ÷ (CN¥1.2b - CN¥924m) (Based on the trailing twelve months to September 2023).

Thus, QuantaSing Group has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.6%.

See our latest analysis for QuantaSing Group

In the above chart we have measured QuantaSing Group'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 QuantaSing Group for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for QuantaSing Group's returns and its level of capital employed because both metrics have been steady for the past . Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at QuantaSing Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, QuantaSing Group's current liabilities are still rather high at 74% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On QuantaSing Group's ROCE

In a nutshell, QuantaSing Group has been trudging along with the same returns from the same amount of capital over the last . It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 74% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with QuantaSing Group (including 1 which doesn't sit too well with us) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.