Some Investors May Be Worried About Kip McGrath Education Centres' (ASX:KME) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kip McGrath Education Centres (ASX:KME) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Kip McGrath Education Centres:

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

0.086 = AU$2.2m ÷ (AU$34m - AU$9.4m) (Based on the trailing twelve months to December 2022).

Therefore, Kip McGrath Education Centres has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Consumer Services industry average of 4.8%.

Check out our latest analysis for Kip McGrath Education Centres

Above you can see how the current ROCE for Kip McGrath Education Centres compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kip McGrath Education Centres.

What Can We Tell From Kip McGrath Education Centres' ROCE Trend?

When we looked at the ROCE trend at Kip McGrath Education Centres, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 8.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Kip McGrath Education Centres in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 28% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Kip McGrath Education Centres does have some risks though, and we've spotted 2 warning signs for Kip McGrath Education Centres that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.