If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, China Maple Leaf Educational Systems (HKG:1317) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on China Maple Leaf Educational Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = CN¥272m ÷ (CN¥6.2b - CN¥1.5b) (Based on the trailing twelve months to August 2024).
Thus, China Maple Leaf Educational Systems has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.4%.
See our latest analysis for China Maple Leaf Educational Systems
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how China Maple Leaf Educational Systems has performed in the past in other metrics, you can view this free graph of China Maple Leaf Educational Systems' past earnings, revenue and cash flow.
The Trend Of ROCE
There is reason to be cautious about China Maple Leaf Educational Systems, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on China Maple Leaf Educational Systems becoming one if things continue as they have.
Our Take On China Maple Leaf Educational Systems' ROCE
In summary, it's unfortunate that China Maple Leaf Educational Systems is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 87% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you'd like to know more about China Maple Leaf Educational Systems, we've spotted 3 warning signs, and 2 of them don't sit too well with us.
While China Maple Leaf Educational Systems 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.