If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at China 21st Century Education Group (HKG:1598) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. Analysts use this formula to calculate it for China 21st Century Education Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = CN¥80m ÷ (CN¥2.2b - CN¥864m) (Based on the trailing twelve months to June 2024).
Thus, China 21st Century Education Group has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 12%.
See our latest analysis for China 21st Century Education Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for China 21st Century Education Group's ROCE against it's prior returns. If you're interested in investigating China 21st Century Education Group's past further, check out this free graph covering China 21st Century Education Group's past earnings, revenue and cash flow.
What Can We Tell From China 21st Century Education Group's ROCE Trend?
On the surface, the trend of ROCE at China 21st Century Education Group doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that China 21st Century Education Group is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 83% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
If you'd like to know more about China 21st Century Education Group, we've spotted 4 warning signs, and 2 of them can't be ignored.
While China 21st Century Education Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.