Returns On Capital At China Beststudy Education Group (HKG:3978) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think China Beststudy Education Group (HKG:3978) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 China Beststudy Education Group, this is the formula:

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

0.024 = CN¥40m ÷ (CN¥3.2b - CN¥1.5b) (Based on the trailing twelve months to December 2020).

So, China Beststudy Education Group has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.9%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of China Beststudy Education Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, China Beststudy Education Group has done well to pay down its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

In summary, China Beststudy Education Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 48% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

China Beststudy Education Group does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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