Returns On Capital Signal Tricky Times Ahead For Scholar Education Group (HKG:1769)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Scholar Education Group (HKG:1769) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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

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

0.12 = CN¥58m ÷ (CN¥735m - CN¥229m) (Based on the trailing twelve months to June 2023).

Thus, Scholar Education Group has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Consumer Services industry.

View our latest analysis for Scholar Education Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Scholar Education Group's ROCE against it's prior returns. If you'd like to look at how Scholar Education Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Scholar Education Group's ROCE Trend?

On the surface, the trend of ROCE at Scholar Education Group doesn't inspire confidence. Around five years ago the returns on capital were 54%, but since then they've fallen to 12%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Scholar Education Group has decreased its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Scholar Education Group's ROCE

To conclude, we've found that Scholar Education Group is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 87% 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.

Scholar Education Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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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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.