Be Wary Of Leader Education (HKG:1449) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Leader Education (HKG:1449), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Leader Education, this is the formula:

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

0.037 = CN¥58m ÷ (CN¥2.3b - CN¥728m) (Based on the trailing twelve months to February 2024).

Thus, Leader Education has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 12%.

Check out our latest analysis for Leader Education

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leader Education's ROCE against it's prior returns. If you'd like to look at how Leader Education has performed in the past in other metrics, you can view this free graph of Leader Education's past earnings, revenue and cash flow.

What Can We Tell From Leader Education's ROCE Trend?

On the surface, the trend of ROCE at Leader Education doesn't inspire confidence. To be more specific, ROCE has fallen from 5.6% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Leader Education is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 19% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 3 warning signs with Leader Education (at least 1 which is concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.