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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at JH Educational Technology (HKG:1935) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for JH Educational Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥365m ÷ (CN¥3.0b - CN¥554m) (Based on the trailing twelve months to December 2021).
Therefore, JH Educational Technology has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 9.9% it's much better.
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 want to delve into the historical earnings, revenue and cash flow of JH Educational Technology, check out these free graphs here.
How Are Returns Trending?
Investors would be pleased with what's happening at JH Educational Technology. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 144%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On JH Educational Technology's ROCE
To sum it up, JH Educational Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 17% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if JH Educational Technology can keep these trends up, it could have a bright future ahead.
Like most companies, JH Educational Technology does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
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.