Returns On Capital At China YuHua Education (HKG:6169) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So, when we ran our eye over China YuHua Education's (HKG:6169) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China YuHua Education is:

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

0.12 = CN¥998m ÷ (CN¥11b - CN¥2.5b) (Based on the trailing twelve months to February 2023).

So, China YuHua Education has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Consumer Services industry.

See our latest analysis for China YuHua Education

In the above chart we have measured China YuHua Education'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.

So How Is China YuHua Education's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 116% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From China YuHua Education's ROCE

The main thing to remember is that China YuHua Education has proven its ability to continually reinvest at respectable rates of return. Despite these impressive fundamentals, the stock has collapsed 76% over the last five years, so there is likely other factors affecting the company's future prospects. In any case, we like the underlying trends and would look further into this stock.

On a final note, we've found 1 warning sign for China YuHua Education that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.