Returns On Capital Signal Difficult Times Ahead For China Maple Leaf Educational Systems (HKG:1317)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at China Maple Leaf Educational Systems (HKG:1317), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for China Maple Leaf Educational Systems:

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%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 10%.

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'd like to look at how China Maple Leaf Educational Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Maple Leaf Educational Systems Tell Us?

There is reason to be cautious about China Maple Leaf Educational Systems, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. 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.

Our Take On China Maple Leaf Educational Systems' ROCE

In summary, it's unfortunate that China Maple Leaf Educational Systems is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 91% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

China Maple Leaf Educational Systems does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those can't be ignored...

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.