Stock Analysis

China Gingko Education Group's (HKG:1851) Returns On Capital Not Reflecting Well On The Business

SEHK:1851
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating China Gingko Education Group (HKG:1851), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.057 = CN¥50m ÷ (CN¥1.2b - CN¥319m) (Based on the trailing twelve months to December 2021).

So, China Gingko Education Group has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.9%.

See our latest analysis for China Gingko Education Group

roce
SEHK:1851 Return on Capital Employed May 2nd 2022

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'd like to look at how China Gingko Education Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

When we looked at the ROCE trend at China Gingko Education Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, China Gingko Education Group has decreased its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On China Gingko Education Group's ROCE

While returns have fallen for China Gingko Education Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 43% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with China Gingko Education Group (at least 2 which are significant) , and understanding them would certainly be useful.

While China Gingko 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.