Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at QuantaSing Group (NASDAQ:QSG), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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 QuantaSing Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.42 = CN¥171m ÷ (CN¥1.3b - CN¥947m) (Based on the trailing twelve months to December 2023).
Thus, QuantaSing Group has an ROCE of 42%. That's a fantastic return and not only that, it outpaces the average of 7.7% earned by companies in a similar industry.
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.
So How Is QuantaSing Group's ROCE Trending?
Things have been pretty stable at QuantaSing Group, with its capital employed and returns on that capital staying somewhat the same for the last . Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So it may not be a multi-bagger in the making, but given the decent 42% return on capital, it'd be difficult to find fault with the business's current operations.
On a side note, QuantaSing Group's current liabilities are still rather high at 70% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On QuantaSing Group's ROCE
In summary, QuantaSing Group isn't compounding its earnings but is generating decent returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 65% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you'd like to know more about QuantaSing Group, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.
QuantaSing Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.