The Returns On Capital At Virscend Education (HKG:1565) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Virscend Education (HKG:1565) we aren't filled with optimism, but let's investigate further.

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 Virscend Education:

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

0.025 = CN¥68m ÷ (CN¥4.0b - CN¥1.3b) (Based on the trailing twelve months to August 2022).

So, Virscend Education has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.7%.

See our latest analysis for Virscend Education

Historical performance is a great place to start when researching a stock so above you can see the gauge for Virscend Education's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Virscend Education, check out these free graphs here.

What Does the ROCE Trend For Virscend Education Tell Us?

In terms of Virscend Education's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Virscend Education becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Virscend Education is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 96% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Virscend Education (of which 3 are potentially serious!) that you should know about.

While Virscend 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.