Investors Met With Slowing Returns on Capital At Leader Education (HKG:1449)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Leader Education (HKG:1449) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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)

0.043 = CN¥67m ÷ (CN¥1.9b - CN¥406m) (Based on the trailing twelve months to February 2022).

Therefore, Leader Education has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.9%.

Check out our latest analysis for Leader Education

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

So How Is Leader Education's ROCE Trending?

The returns on capital haven't changed much for Leader Education in recent years. The company has employed 57% more capital in the last four years, and the returns on that capital have remained stable at 4.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Leader Education's ROCE

In conclusion, Leader Education has been investing more capital into the business, but returns on that capital haven't increased. And in the last year, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

On a final note, we found 3 warning signs for Leader Education (2 make us uncomfortable) you should be aware of.

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.