China New Higher Education Group (HKG:2001) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 China New Higher Education Group (HKG:2001) so let's look a bit deeper.

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 China New Higher Education Group is:

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

0.11 = CN¥634m ÷ (CN¥9.1b - CN¥3.2b) (Based on the trailing twelve months to August 2022).

Thus, China New Higher Education Group has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Consumer Services industry.

Check out our latest analysis for China New Higher Education Group

Above you can see how the current ROCE for China New Higher Education Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China New Higher Education Group.

So How Is China New Higher Education Group's ROCE Trending?

Investors would be pleased with what's happening at China New Higher Education Group. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 194%. So we're very much inspired by what we're seeing at China New Higher Education Group thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 35% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

To sum it up, China New Higher Education Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 5.6% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 2 warning signs for China New Higher Education Group you'll probably want to know about.

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.