We Like These Underlying Return On Capital Trends At Minsheng Education Group (HKG:1569)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Minsheng Education Group (HKG:1569) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.066 = CN¥484m ÷ (CN¥12b - CN¥4.1b) (Based on the trailing twelve months to June 2023).

Therefore, Minsheng Education Group has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 11%.

View our latest analysis for Minsheng Education Group

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

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.6%. 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 102%. So we're very much inspired by what we're seeing at Minsheng Education Group thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 36% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In summary, it's great to see that Minsheng Education Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Although the company may be facing some issues elsewhere since the stock has plunged 76% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know about the risks facing Minsheng Education Group, we've discovered 1 warning sign that you should be aware of.

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.

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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.