Returns On Capital At China Vocational Education Holdings (HKG:1756) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at China Vocational Education Holdings (HKG:1756) and its ROCE trend, we weren't exactly thrilled.

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 China Vocational Education Holdings, this is the formula:

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

0.084 = CN¥454m ÷ (CN¥6.7b - CN¥1.3b) (Based on the trailing twelve months to February 2023).

So, China Vocational Education Holdings has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 9.9%.

View our latest analysis for China Vocational Education 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're interested in investigating China Vocational Education Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for China Vocational Education Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 8.4% and the business has deployed 118% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 19% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

In conclusion, China Vocational Education Holdings has been investing more capital into the business, but returns on that capital haven't increased. Moreover, since the stock has crumbled 78% over the last three years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, China Vocational Education Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

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.