Virscend Education (HKG:1565) May Have Issues Allocating Its Capital

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Virscend Education (HKG:1565), we weren't too upbeat about how things were going.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.075 = CN¥196m ÷ (CN¥4.2b - CN¥1.6b) (Based on the trailing twelve months to February 2025).

Thus, Virscend Education has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.6%.

Check out our latest analysis for Virscend Education

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Virscend Education's past further, check out this free graph covering Virscend Education's past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE at Virscend Education is showing some signs of weakness. The company used to generate 10% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 42% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Virscend Education's ROCE

In summary, it's unfortunate that Virscend Education is shrinking its capital base and also generating lower returns. We expect this has contributed to the stock plummeting 89% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.