Returns On Capital Signal Tricky Times Ahead For China Kepei Education Group (HKG:1890)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at China Kepei Education Group (HKG:1890) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for China Kepei Education Group, this is the formula:

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

0.13 = CN¥729m ÷ (CN¥7.4b - CN¥2.0b) (Based on the trailing twelve months to August 2023).

So, China Kepei Education Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Consumer Services industry.

Check out our latest analysis for China Kepei Education Group

In the above chart we have measured China Kepei Education Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Kepei Education Group here for free.

What The Trend Of ROCE Can Tell Us

In terms of China Kepei Education Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like China Kepei 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.

The Bottom Line

In summary, China Kepei Education Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 73% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think China Kepei Education Group has the makings of a multi-bagger.

China Kepei Education Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While China Kepei Education Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.