If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Virscend Education (HKG:1565), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Virscend Education, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CN¥181m ÷ (CN¥4.2b - CN¥1.4b) (Based on the trailing twelve months to February 2024).
Therefore, Virscend Education has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 12%.
View our latest analysis for Virscend Education
Historical performance is a great place to start when researching a stock so above you can see the gauge for Virscend Education's 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 Virscend Education.
What Does the ROCE Trend For Virscend Education Tell Us?
The trend of ROCE at Virscend Education is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 6.4% we see today. On top of that, the business is utilizing 22% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
In Conclusion...
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 88% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with Virscend Education (including 2 which are a bit unpleasant) .
While Virscend Education may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com