Here's What To Make Of Qtone Education Group (Guangdong)Ltd's (SZSE:300359) Decelerating Rates Of Return

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Qtone Education Group (Guangdong)Ltd (SZSE:300359) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Qtone Education Group (Guangdong)Ltd, this is the formula:

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

0.042 = CN¥35m ÷ (CN¥1.0b - CN¥174m) (Based on the trailing twelve months to March 2024).

Thus, Qtone Education Group (Guangdong)Ltd has an ROCE of 4.2%. In absolute terms, that's a low return, but it's much better than the Software industry average of 3.0%.

See our latest analysis for Qtone Education Group (Guangdong)Ltd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Qtone Education Group (Guangdong)Ltd.

So How Is Qtone Education Group (Guangdong)Ltd's ROCE Trending?

We're a bit concerned with the trends, because the business is applying 47% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Our Take On Qtone Education Group (Guangdong)Ltd's ROCE

Overall, we're not ecstatic to see Qtone Education Group (Guangdong)Ltd reducing the amount of capital it employs in the business. Since the stock has declined 38% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Qtone Education Group (Guangdong)Ltd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.