Shanghai Gench Education Group (HKG:1525) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at Shanghai Gench Education Group (HKG:1525) so let's look a bit deeper.

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

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. The formula for this calculation on Shanghai Gench Education Group is:

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

0.11 = CN¥275m ÷ (CN¥3.2b - CN¥659m) (Based on the trailing twelve months to December 2021).

Thus, Shanghai Gench Education Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Services industry average of 9.9%.

See our latest analysis for Shanghai Gench Education Group

Above you can see how the current ROCE for Shanghai Gench Education Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shanghai Gench Education Group here for free.

How Are Returns Trending?

Shanghai Gench Education Group is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 55%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Shanghai Gench Education Group has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Shanghai Gench Education Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shanghai Gench Education Group has. Given the stock has declined 45% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing Shanghai Gench Education Group, we've discovered 2 warning signs that you should be aware of.

While Shanghai Gench Education Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.