In This Article:
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Quartix Technologies (LON:QTX), we don't think it's current trends fit the mold of a multi-bagger.
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)
0.082 = UK£1.6m ÷ (UK£30m - UK£10m) (Based on the trailing twelve months to June 2024).
So, Quartix Technologies has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.
See 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, you can check out the forecasts from the analysts covering Quartix Technologies for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Quartix Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.2% from 49% five years ago. However it looks like Quartix Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Quartix Technologies' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Quartix Technologies could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for QTX on our platform quite valuable.