Is Kip McGrath Education Centres (ASX:KME) Likely To Turn Things Around?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Kip McGrath Education Centres (ASX:KME) 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?

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 Kip McGrath Education Centres is:

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

0.10 = AU$2.2m ÷ (AU$29m - AU$8.7m) (Based on the trailing twelve months to June 2020).

Therefore, Kip McGrath Education Centres has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Services industry average of 8.9%.

See our latest analysis for Kip McGrath Education Centres

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kip McGrath Education Centres' ROCE against it's prior returns. If you're interested in investigating Kip McGrath Education Centres' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because Kip McGrath Education Centres' ROCE has reduced by 27% over the last five years, while the business employed 87% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Kip McGrath Education Centres' earnings and if they change as a result from the capital raise.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Kip McGrath Education Centres' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 313% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 5 warning signs for Kip McGrath Education Centres (1 is potentially serious) you should be aware of.

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