The Returns On Capital At China 21st Century Education Group (HKG:1598) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at China 21st Century Education Group (HKG:1598), it didn't seem to tick all of these boxes.

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. 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)

0.037 = CN¥56m ÷ (CN¥2.2b - CN¥654m) (Based on the trailing twelve months to June 2023).

Therefore, China 21st Century Education Group has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 10%.

View our latest analysis for China 21st Century Education Group

Above you can see how the current ROCE for China 21st Century 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 China 21st Century Education Group.

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. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 3.7%. 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.

What We Can Learn From China 21st Century Education Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that China 21st Century Education Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 64% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with China 21st Century Education Group (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

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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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.