China Gingko Education Group (HKG:1851) Is Experiencing Growth In Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in China Gingko Education Group's (HKG:1851) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on China Gingko Education Group is:

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

0.15 = CN¥162m ÷ (CN¥1.5b - CN¥393m) (Based on the trailing twelve months to December 2023).

Therefore, China Gingko Education Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Consumer Services industry.

View our latest analysis for China Gingko Education Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Gingko Education Group's ROCE against it's prior returns. If you're interested in investigating China Gingko Education Group's past further, check out this free graph covering China Gingko Education Group's past earnings, revenue and cash flow.

So How Is China Gingko Education Group's ROCE Trending?

The trends we've noticed at China Gingko Education Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 164%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On China Gingko Education Group's ROCE

All in all, it's terrific to see that China Gingko Education Group is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 52% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching China Gingko Education Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.