Minsheng Education Group's (HKG:1569) Returns On Capital Not Reflecting Well On The Business

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Minsheng Education Group (HKG:1569) 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?

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. Analysts use this formula to calculate it for Minsheng Education Group:

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

0.045 = CN¥319m ÷ (CN¥9.1b - CN¥2.0b) (Based on the trailing twelve months to December 2020).

So, Minsheng Education Group has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.9%.

See our latest analysis for Minsheng Education Group

Above you can see how the current ROCE for Minsheng 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 to see what analysts are forecasting going forward, you should check out our free report for Minsheng Education Group.

So How Is Minsheng Education Group's ROCE Trending?

On the surface, the trend of ROCE at Minsheng Education Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Minsheng Education Group's ROCE

While returns have fallen for Minsheng Education Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 37% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 4 warning signs for Minsheng Education Group you'll probably want to know about.

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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