JH Educational Technology (HKG:1935) Is Experiencing Growth In Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in JH Educational Technology's (HKG:1935) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on JH Educational Technology is:

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

0.13 = CN¥417m ÷ (CN¥3.4b - CN¥143m) (Based on the trailing twelve months to June 2023).

Thus, JH Educational Technology has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Consumer Services industry.

View our latest analysis for JH Educational Technology

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

The Trend Of ROCE

We like the trends that we're seeing from JH Educational Technology. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 150% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, JH Educational Technology has decreased current liabilities to 4.3% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what JH Educational Technology has. Although the company may be facing some issues elsewhere since the stock has plunged 73% in the last three years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

While JH Educational Technology looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 1935 is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.