The Returns At Leader Education (HKG:1449) Aren't Growing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Leader Education (HKG:1449) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Leader Education:

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

0.044 = CN¥68m ÷ (CN¥1.9b - CN¥376m) (Based on the trailing twelve months to February 2021).

So, Leader Education has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.0%.

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

The Trend Of ROCE

In terms of Leader Education's historical ROCE trend, it doesn't exactly demand attention. Over the past three years, ROCE has remained relatively flat at around 4.4% and the business has deployed 56% 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.

What We Can Learn From Leader Education's ROCE

Long story short, while Leader Education has been reinvesting its capital, the returns that it's generating haven't increased. And in the last year, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Leader Education has the makings of a multi-bagger.

Leader Education does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.

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.

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