What Do The Returns On Capital At MT Educare (NSE:MTEDUCARE) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at MT Educare (NSE:MTEDUCARE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for MT Educare:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.064 = ₹228m ÷ (₹5.3b - ₹1.8b) (Based on the trailing twelve months to December 2019).

Therefore, MT Educare has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

View our latest analysis for MT Educare

Historical performance is a great place to start when researching a stock so above you can see the gauge for MT Educare's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MT Educare, check out these free graphs here.

What Can We Tell From MT Educare's ROCE Trend?

When we looked at the ROCE trend at MT Educare, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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 Bottom Line On MT Educare's ROCE

In summary, MT Educare is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 91% 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 MT Educare has the makings of a multi-bagger.

On a final note, we've found 4 warning signs for MT Educare that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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