Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Quartix Technologies (LON:QTX), so let's see why.

What is 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. Analysts use this formula to calculate it for Quartix Technologies:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.28 = UK£5.3m ÷ (UK£26m - UK£7.4m) (Based on the trailing twelve months to December 2021).

Therefore, Quartix Technologies has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Software industry average of 8.3%.

View our latest analysis for Quartix Technologies  roce

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 to see what analysts are forecasting going forward, you should check out our freereport for Quartix Technologies.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Quartix Technologies. About five years ago, returns on capital were 36%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Quartix Technologies becoming one if things continue as they have.



In Conclusion...

In summary, it's unfortunate that Quartix Technologies is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 13% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you're still interested in Quartix Technologies it's worth checking out our  FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you'd like to see other companies earning high returns, check out our freelist of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.