What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think China Science and Education Industry Group (HKG:1756) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Science and Education Industry Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = CN¥549m ÷ (CN¥7.5b - CN¥1.6b) (Based on the trailing twelve months to August 2024).
Thus, China Science and Education Industry Group has an ROCE of 9.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.4%.
Check out our latest analysis for China Science and Education Industry Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Science and Education Industry Group'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 China Science and Education Industry Group .
So How Is China Science and Education Industry Group's ROCE Trending?
There are better returns on capital out there than what we're seeing at China Science and Education Industry Group. The company has consistently earned 9.4% for the last five years, and the capital employed within the business has risen 102% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, China Science and Education Industry Group has done well to reduce current liabilities to 22% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
Our Take On China Science and Education Industry Group's ROCE
In conclusion, China Science and Education Industry Group has been investing more capital into the business, but returns on that capital haven't increased. Moreover, since the stock has crumbled 80% over the last five years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Like most companies, China Science and Education Industry Group does come with some risks, and we've found 1 warning sign that you should be aware of.
While China Science and Education Industry 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.