Here's What To Make Of Chen Lin Education Group Holdings' (HKG:1593) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Chen Lin Education Group Holdings (HKG:1593) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. To calculate this metric for Chen Lin Education Group Holdings, this is the formula:

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

0.10 = CN¥123m ÷ (CN¥1.4b - CN¥226m) (Based on the trailing twelve months to June 2020).

Thus, Chen Lin Education Group Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.3% generated by the Consumer Services industry.

See our latest analysis for Chen Lin Education Group Holdings

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 want to delve into the historical earnings, revenue and cash flow of Chen Lin Education Group Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Chen Lin Education Group Holdings' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 24%, but since then they've fallen to 10%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Chen Lin Education Group Holdings has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Chen Lin Education Group Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Chen Lin Education Group Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 25% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Chen Lin Education Group Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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