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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at China Beststudy Education Group's (HKG:3978) look very promising so lets take a look.
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. To calculate this metric for China Beststudy Education Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = CN¥177m ÷ (CN¥1.4b - CN¥674m) (Based on the trailing twelve months to June 2024).
So, China Beststudy Education Group has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
View our latest analysis for China Beststudy Education Group
Above you can see how the current ROCE for China Beststudy Education Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for China Beststudy Education Group .
The Trend Of ROCE
We're pretty happy with how the ROCE has been trending at China Beststudy Education Group. The figures show that over the last five years, returns on capital have grown by 456%. The company is now earning CN¥0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 50% less capital than it was five years ago. China Beststudy Education Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a separate but related note, it's important to know that China Beststudy Education Group has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On China Beststudy Education Group's ROCE
In summary, it's great to see that China Beststudy Education Group has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 39% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
China Beststudy Education Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.