Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Quectel Wireless Solutions (SHSE:603236), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Quectel Wireless Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥116m ÷ (CN¥11b - CN¥5.2b) (Based on the trailing twelve months to September 2023).
So, Quectel Wireless Solutions has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.
Check out our latest analysis for Quectel Wireless Solutions
In the above chart we have measured Quectel Wireless Solutions' 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 Quectel Wireless Solutions here for free.
What Does the ROCE Trend For Quectel Wireless Solutions Tell Us?
On the surface, the trend of ROCE at Quectel Wireless Solutions doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 2.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
Another thing to note, Quectel Wireless Solutions has a high ratio of current liabilities to total assets of 49%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
In summary, Quectel Wireless Solutions is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last three years. Therefore based on the analysis done in this article, we don't think Quectel Wireless Solutions has the makings of a multi-bagger.
Like most companies, Quectel Wireless Solutions does come with some risks, and we've found 3 warning signs that you should be aware of.
While Quectel Wireless Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.