Returns On Capital At China Beststudy Education Group (HKG:3978) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating China Beststudy Education Group (HKG:3978), we don't think it's current trends fit the mold of a multi-bagger.

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 Beststudy Education Group is:

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

0.043 = CN¥67m ÷ (CN¥2.7b - CN¥1.2b) (Based on the trailing twelve months to June 2020).

Thus, China Beststudy Education Group has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.3%.

View our latest analysis for China Beststudy Education Group

In the above chart we have measured China Beststudy Education Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Beststudy Education Group here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at China Beststudy Education Group doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last four years. 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 Beststudy Education Group has done well to pay down its current liabilities to 43% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On China Beststudy Education Group's ROCE

Bringing it all together, while we're somewhat encouraged by China Beststudy Education Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 33% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, China Beststudy Education Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While China Beststudy Education Group 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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