What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in IQ Group Holdings Berhad's (KLSE:IQGROUP) returns on capital, so let's have a look.

What Is 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 IQ Group Holdings Berhad, this is the formula:

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

0.061 = RM8.1m ÷ (RM154m - RM22m) (Based on the trailing twelve months to June 2023).

So, IQ Group Holdings Berhad has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 14%.

View our latest analysis for IQ Group Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating IQ Group Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is IQ Group Holdings Berhad's ROCE Trending?

Shareholders will be relieved that IQ Group Holdings Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.1% on its capital. While returns have increased, the amount of capital employed by IQ Group Holdings Berhad has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

What We Can Learn From IQ Group Holdings Berhad's ROCE

To bring it all together, IQ Group Holdings Berhad has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 29% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching IQ Group Holdings Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.

While IQ Group Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.