Wisdom Education International Holdings' (HKG:6068) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Although, when we looked at Wisdom Education International Holdings (HKG:6068), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Wisdom Education International Holdings is:

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 7.8% it's much better.

View our latest analysis for Wisdom Education International Holdings

Above you can see how the current ROCE for Wisdom Education International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

We weren't thrilled with the trend because Wisdom Education International Holdings' ROCE has reduced by 27% over the last five years, while the business employed 335% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. 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 side note, Wisdom Education International Holdings has done well to pay down its current liabilities to 25% 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 Key Takeaway

To conclude, we've found that Wisdom Education International Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 59% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Wisdom Education International Holdings has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Wisdom Education International Holdings you'll probably want to know about.

While Wisdom Education International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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