Top Education Group (HKG:1752) Could Be At Risk Of Shrinking As A Company

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Top Education Group (HKG:1752), we weren't too hopeful.

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

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

0.021 = AU$1.3m ÷ (AU$77m - AU$14m) (Based on the trailing twelve months to June 2024).

Thus, Top Education Group has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 11%.

See our latest analysis for Top Education Group

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 , check out these free graphs detailing revenue and cash flow performance of Top Education Group.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Top Education Group. To be more specific, the ROCE was 6.6% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Top Education Group to turn into a multi-bagger.

The Bottom Line On Top Education Group's ROCE

In summary, it's unfortunate that Top Education Group is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 74% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Top Education Group, we've spotted 4 warning signs, and 1 of them is concerning.

While Top Education Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.