Returns On Capital At Scholar Education Group (HKG:1769) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Scholar Education Group (HKG:1769) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Scholar Education Group, this is the formula:

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

0.016 = CN¥16m ÷ (CN¥1.7b - CN¥645m) (Based on the trailing twelve months to December 2020).

Therefore, Scholar Education Group has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.9%.

View our latest analysis for Scholar Education Group

In the above chart we have measured Scholar Education Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Scholar Education Group.

What Does the ROCE Trend For Scholar Education Group Tell Us?

In terms of Scholar Education Group's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 21%, but since then they've fallen to 1.6%. However it looks like Scholar 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, Scholar Education Group has decreased its current liabilities to 39% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Scholar Education Group's ROCE

In summary, Scholar Education Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 57% in the last year. 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.

One more thing to note, we've identified 4 warning signs with Scholar Education Group and understanding these should be part of your investment process.

While Scholar Education Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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