Yahoo Finance The Returns On Capital At Quartix Technologies (LON:QTX) Don't Inspire Confidence
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Quartix Technologies (LON:QTX), so let's see why.
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. To calculate this metric for Quartix Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = UK£3.4m ÷ (UK£25m - UK£8.5m) (Based on the trailing twelve months to June 2021).
Therefore, Quartix Technologies has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Software industry average of 9.1%.
View our latest analysis for Quartix Technologies
In the above chart we have measured Quartix Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Quartix Technologies.
The Trend Of ROCE
In terms of Quartix Technologies' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 41% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Quartix Technologies becoming one if things continue as they have.
The Bottom Line On Quartix Technologies' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 39% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to continue researching Quartix Technologies, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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