If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at QuakeSafe Technologies (SZSE:300767), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on QuakeSafe Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = CN¥111m ÷ (CN¥2.6b - CN¥560m) (Based on the trailing twelve months to March 2023).
Therefore, QuakeSafe Technologies has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 7.3%.
Check out our latest analysis for QuakeSafe Technologies
Above you can see how the current ROCE for QuakeSafe Technologies 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.
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 311%. Usually this isn't ideal, but given QuakeSafe Technologies conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence QuakeSafe Technologies might not have received a full period of earnings contribution from it. Additionally, we found that QuakeSafe Technologies' most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
What We Can Learn From QuakeSafe Technologies' ROCE
In summary, QuakeSafe Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.
If you're still interested in QuakeSafe Technologies it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While QuakeSafe Technologies 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.