If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think China YuHua Education (HKG:6169) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China YuHua Education, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥801m ÷ (CN¥12b - CN¥4.2b) (Based on the trailing twelve months to February 2024).
So, China YuHua Education has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Consumer Services industry.
See our latest analysis for China YuHua Education
Above you can see how the current ROCE for China YuHua Education compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China YuHua Education .
So How Is China YuHua Education's ROCE Trending?
In terms of China YuHua Education's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by China YuHua Education's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 93% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think China YuHua Education has the makings of a multi-bagger.
If you'd like to know more about China YuHua Education, we've spotted 5 warning signs, and 3 of them make us uncomfortable.
While China YuHua 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.