Here's What's Concerning About Wisdom Education International Holdings' (HKG:6068) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Wisdom Education International Holdings (HKG:6068) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 Wisdom Education International Holdings, this is the formula:

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

0.10 = CN¥658m ÷ (CN¥8.6b - CN¥2.2b) (Based on the trailing twelve months to February 2021).

Thus, Wisdom Education International Holdings has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 7.7% it's much better.

See our latest analysis for Wisdom Education International Holdings

In the above chart we have measured Wisdom Education International Holdings' 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.

What Does the ROCE Trend For Wisdom Education International Holdings Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 335%. That being said, Wisdom Education International Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wisdom Education International Holdings might not have received a full period of earnings contribution from it.

On a related note, Wisdom Education International Holdings has decreased its current liabilities to 25% 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. 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.

What We Can Learn From Wisdom Education International Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Wisdom Education International Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 63% 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.

If you'd like to know about the risks facing Wisdom Education International Holdings, we've discovered 4 warning signs that you should be aware of.

While Wisdom Education International 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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