Yahoo Finance Why Questor Technology Inc.’s (CVE:QST) Return On Capital Employed Is Impressive
Today we'll evaluate Questor Technology Inc. (CVE:QST) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Questor Technology:
0.33 = CA$9.9m ÷ (CA$33m - CA$3.0m) (Based on the trailing twelve months to March 2019.)
Therefore, Questor Technology has an ROCE of 33%.
Check out our latest analysis for Questor Technology
Is Questor Technology's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Questor Technology's ROCE is meaningfully higher than the 6.8% average in the Energy Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Questor Technology's ROCE in absolute terms currently looks quite high.
In our analysis, Questor Technology's ROCE appears to be 33%, compared to 3 years ago, when its ROCE was 1.7%. This makes us think the business might be improving. The image below shows how Questor Technology's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like Questor Technology are cyclical businesses. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Questor Technology's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Questor Technology has total liabilities of CA$3.0m and total assets of CA$33m. Therefore its current liabilities are equivalent to approximately 9.1% of its total assets. Minimal current liabilities are not distorting Questor Technology's impressive ROCE.
What We Can Learn From Questor Technology's ROCE
This is an attractive combination and suggests the company could have potential. Questor Technology shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
