Capital Allocation Trends At China General Education Group (HKG:2175) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at China General Education Group (HKG:2175) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China General Education Group:

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

0.057 = CN¥92m ÷ (CN¥1.8b - CN¥227m) (Based on the trailing twelve months to February 2022).

So, China General Education Group has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.3%.

Check out the opportunities and risks within the HK Consumer Services industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for China General Education Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China General Education Group, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at China General Education Group doesn't inspire confidence. Around three years ago the returns on capital were 15%, but since then they've fallen to 5.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, China General Education Group has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, China General Education Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 22% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China General Education Group has the makings of a multi-bagger.

China General Education Group does have some risks though, and we've spotted 1 warning sign for China General Education Group that you might be interested in.

While China General 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.