Returns On Capital At Leader Education (HKG:1449) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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)

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).

Thus, Leader Education has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.1%.

Check out the opportunities and risks within the HK Consumer Services industry.

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 want to delve into the historical earnings, revenue and cash flow of Leader Education, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Leader Education in recent years. Over the past four years, ROCE has remained relatively flat at around 4.3% and the business has deployed 57% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

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. Since the stock has declined 45% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 3 warning signs for Leader Education (2 are a bit unpleasant) you should be aware of.

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.