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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at China Maple Leaf Educational Systems (HKG:1317) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Maple Leaf Educational Systems, this is the formula:

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

0.072 = CN¥535m ÷ (CN¥11b - CN¥3.2b) (Based on the trailing twelve months to February 2021).

Thus, China Maple Leaf Educational Systems has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 7.9%.

See our latest analysis for China Maple Leaf Educational Systems

Above you can see how the current ROCE for China Maple Leaf Educational Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Maple Leaf Educational Systems here for free.

What Can We Tell From China Maple Leaf Educational Systems' ROCE Trend?

On the surface, the trend of ROCE at China Maple Leaf Educational Systems doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. 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.

What We Can Learn From China Maple Leaf Educational Systems' ROCE

While returns have fallen for China Maple Leaf Educational Systems in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 43% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 3 warning signs with China Maple Leaf Educational Systems and understanding them should be part of your investment process.

While China Maple Leaf Educational Systems 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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