Return Trends At Leader Education (HKG:1449) Aren't Appealing

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. 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 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)

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 Leader Education, this is the formula:

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

0.043 = CN¥71m ÷ (CN¥2.1b - CN¥443m) (Based on the trailing twelve months to February 2023).

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 8.4%.

View 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 past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Leader Education's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.3% for the last five years, and the capital employed within the business has risen 67% in that time. 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 summary, Leader Education has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 47% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Leader Education, we've spotted 4 warning signs, and 2 of them are a bit unpleasant.

While Leader Education 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.