Offcn Education Technology's (SZSE:002607) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Offcn Education Technology (SZSE:002607), so let's see why.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Offcn Education Technology is:

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

0.13 = CN¥256m ÷ (CN¥7.3b - CN¥5.3b) (Based on the trailing twelve months to March 2024).

Therefore, Offcn Education Technology has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Consumer Services industry.

Check out our latest analysis for Offcn Education Technology

In the above chart we have measured Offcn Education Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Offcn Education Technology .

The Trend Of ROCE

The trend of ROCE at Offcn Education Technology is showing some signs of weakness. To be more specific, today's ROCE was 45% five years ago but has since fallen to 13%. In addition to that, Offcn Education Technology is now employing 38% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a separate but related note, it's important to know that Offcn Education Technology has a current liabilities to total assets ratio of 73%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Offcn Education Technology's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 89% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Offcn Education Technology (1 doesn't sit too well with us) you should be aware of.

While Offcn Education Technology 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.

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