Returns On Capital Signal Tricky Times Ahead For South China Vocational Education Group (HKG:6913)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating South China Vocational Education Group (HKG:6913), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for South China Vocational Education Group, this is the formula:

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

0.041 = CN¥77m ÷ (CN¥2.3b - CN¥483m) (Based on the trailing twelve months to December 2022).

Thus, South China Vocational Education Group has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.3%.

See our latest analysis for South China Vocational Education Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for South China Vocational Education Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of South China Vocational Education Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of South China Vocational Education Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.0% 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'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.

The Bottom Line

In summary, South China Vocational Education Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think South China Vocational Education Group has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing South China Vocational Education Group that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.