South China Vocational Education Group (HKG:6913) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at South China Vocational Education Group (HKG:6913) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on South China Vocational Education Group is:

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

0.034 = CN¥66m ÷ (CN¥2.4b - CN¥412m) (Based on the trailing twelve months to June 2023).

Thus, South China Vocational Education Group has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.9%.

View our latest analysis for South China Vocational Education Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

The Trend Of ROCE

When we looked at the ROCE trend at South China Vocational Education Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.4% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On South China Vocational Education Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that South China Vocational Education Group is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 71% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for South China Vocational Education Group (of which 1 is a bit concerning!) that you should know about.

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.