When researching a stock for investment, what can tell us that the company is in decline? More often than not, we’ll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don’t look too good at Quantum Foods Holdings (JSE:QFH), so let’s see why.
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 Quantum Foods Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0053 = R13m ÷ (R3.0b – R609m) (Based on the trailing twelve months to March 2024).
Therefore, Quantum Foods Holdings has an ROCE of 0.5%. Ultimately, that’s a low return and it under-performs the Food industry average of 9.7%.
View our latest analysis for Quantum Foods Holdings
JSE:QFH Return on Capital Employed November 28th 2024
Historical performance is a great place to start when researching a stock so above you can see the gauge for Quantum Foods Holdings’ ROCE against it’s prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Quantum Foods Holdings.
We are a bit worried about the trend of returns on capital at Quantum Foods Holdings. About five years ago, returns on capital were 16%, however they’re now substantially lower than that as we saw above. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. If these trends continue, we wouldn’t expect Quantum Foods Holdings to turn into a multi-bagger.
In summary, it’s unfortunate that Quantum Foods Holdings is generating lower returns from the same amount of capital. The market must be rosy on the stock’s future because even though the underlying trends aren’t too encouraging, the stock has soared 150%. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.
One final note, you should learn about the 4 warning signs we’ve spotted with Quantum Foods Holdings (including 2 which can’t be ignored) .
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