We Think QuantaSing Group (NASDAQ:QSG) Might Have The DNA Of A Multi-Bagger
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of QuantaSing Group (NASDAQ:QSG) we really liked what we saw.
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. To calculate this metric for QuantaSing Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.48 = CN¥189m ÷ (CN¥1.5b - CN¥1.1b) (Based on the trailing twelve months to March 2024).
Therefore, QuantaSing Group has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 7.6% earned by companies in a similar industry.
View 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 to see what analysts are forecasting going forward, you should check out our free analyst report for QuantaSing Group .
How Are Returns Trending?
QuantaSing Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses one year ago, but now it's earning 48% which is a sight for sore eyes. Not only that, but the company is utilizing 117% 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.
One more thing to note, QuantaSing Group has decreased current liabilities to 73% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
What We Can Learn From QuantaSing Group's ROCE
Long story short, we're delighted to see that QuantaSing Group's reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 78% in the last year. Still, it's worth doing some further research to see if the trends will continue into the future.
On a separate note, we've found 2 warning signs for QuantaSing Group you'll probably want to know about.
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.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com