Here's What's Concerning About Edvantage Group Holdings' (HKG:382) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Edvantage Group Holdings (HKG:382), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Edvantage Group Holdings, this is the formula:

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

0.084 = CN¥332m ÷ (CN¥5.4b - CN¥1.4b) (Based on the trailing twelve months to February 2021).

So, Edvantage Group Holdings has an ROCE of 8.4%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

See our latest analysis for Edvantage Group Holdings

In the above chart we have measured Edvantage Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Edvantage Group Holdings.

The Trend Of ROCE

When we looked at the ROCE trend at Edvantage Group Holdings, we didn't gain much confidence. Around four years ago the returns on capital were 25%, but since then they've fallen to 8.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Edvantage Group Holdings has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On Edvantage Group Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Edvantage Group Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 44% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing, we've spotted 1 warning sign facing Edvantage Group Holdings that you might find interesting.

While Edvantage Group Holdings 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. 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.
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