Returns On Capital Signal Tricky Times Ahead For Global Education Communities (TSE:GEC)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Global Education Communities (TSE:GEC) and its ROCE trend, we weren't exactly thrilled.

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 Global Education Communities:

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

0.027 = CA$9.8m ÷ (CA$482m - CA$124m) (Based on the trailing twelve months to February 2024).

Therefore, Global Education Communities has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.5%.

View our latest analysis for Global Education Communities

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

What Can We Tell From Global Education Communities' ROCE Trend?

When we looked at the ROCE trend at Global Education Communities, we didn't gain much confidence. Around five years ago the returns on capital were 4.6%, but since then they've fallen to 2.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Global Education Communities is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 32% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Global Education Communities we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

While Global Education Communities may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.