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

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Kip McGrath Education Centres (ASX:KME), it didn't seem to tick all of these boxes.

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 Kip McGrath Education Centres, this is the formula:

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%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.6%.

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, you can check out the forecasts from the analysts covering Kip McGrath Education Centres here for free.

SWOT Analysis for Kip McGrath Education Centres

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Kip McGrath Education Centres doesn't inspire 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Kip McGrath Education Centres' ROCE

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. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 2 warning signs facing Kip McGrath Education Centres that you might find interesting.

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. 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.