China Maple Leaf Educational Systems (HKG:1317) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at China Maple Leaf Educational Systems (HKG:1317), so let's see why.

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. The formula for this calculation on China Maple Leaf Educational Systems is:

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

0.047 = CN¥185m ÷ (CN¥6.2b - CN¥2.3b) (Based on the trailing twelve months to August 2023).

Therefore, China Maple Leaf Educational Systems has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 11%.

View our latest analysis for China Maple Leaf Educational Systems

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

The Trend Of ROCE

In terms of China Maple Leaf Educational Systems' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on China Maple Leaf Educational Systems becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Unsurprisingly then, the stock has dived 91% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for China Maple Leaf Educational Systems (of which 2 can't be ignored!) that you should know about.

While China Maple Leaf Educational Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.