China 21st Century Education Group (HKG:1598) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating China 21st Century Education Group (HKG:1598), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China 21st Century Education Group is:

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

0.068 = CN¥53m ÷ (CN¥1.1b - CN¥363m) (Based on the trailing twelve months to December 2020).

Therefore, China 21st Century Education Group has an ROCE of 6.8%. On its own, that's a low figure but it's around the 8.1% average generated by the Consumer Services industry.

See our latest analysis for China 21st Century Education Group

In the above chart we have measured China 21st Century Education Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is China 21st Century Education Group's ROCE Trending?

When we looked at the ROCE trend at China 21st Century Education Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.8% from 19% five years ago. However it looks like China 21st Century Education Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, China 21st Century Education Group has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by China 21st Century Education Group's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 5.5% in the last year to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 3 warning signs for China 21st Century Education Group that we think 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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