Quest Resource trades at $2.43 and has moved in lockstep with the market. Its shares have returned 11.2% over the last six months while the S&P 500 has gained 8.1%.

Is now the time to buy Quest Resource, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Quest Resource Will Underperform?

We're cautious about Quest Resource. Here are three reasons there are better opportunities than QRHC and a stock we'd rather own.

1. Revenue Tumbling Downwards

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Quest Resource’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 3.6% over the last two years.

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Quest Resource’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Quest Resource’s $66.8 million of debt exceeds the $1.15 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $8.85 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Quest Resource could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Quest Resource can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Quest Resource doesn’t pass our quality test. That said, the stock currently trades at 49× forward P/E (or $2.43 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.

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