To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. That's why when we briefly looked at Scholar Education Group's (HKG:1769) ROCE trend, we were very happy with what we saw.
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 Scholar Education Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = CN¥94m ÷ (CN¥761m - CN¥323m) (Based on the trailing twelve months to December 2021).
So, Scholar Education Group has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 8.8%.
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 The Trend Of ROCE Can Tell Us
In terms of Scholar Education Group's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 623% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 43% 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. Although because current liabilities are still 43%, some of that risk is still prevalent.
The Bottom Line On Scholar Education Group's ROCE
Scholar Education Group has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Despite these impressive fundamentals, the stock has collapsed 79% over the last three years, so there is likely other factors affecting the company's future prospects. That's why it's worth looking further into this stock because while these fundamentals look good, there could be other issues with the business.
One final note, you should learn about the 3 warning signs we've spotted with Scholar Education Group (including 2 which can't be ignored) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
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