If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Virscend Education (HKG:1565), so let's see why.
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 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).
So, Virscend Education has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 12%.
See 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.
How Are Returns Trending?
The trend of returns that Virscend Education is generating are raising some concerns. To be more specific, today's ROCE was 11% five years ago but has since fallen to 6.4%. On top of that, the business is utilizing 22% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line On Virscend Education's ROCE
To see Virscend Education reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 88% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Virscend Education we've found 6 warning signs (2 are potentially serious!) that you should be aware of before investing here.
While Virscend Education 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.