South China Vocational Education Group (HKG:6913) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at South China Vocational Education Group (HKG:6913), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.023 = CN¥45m ÷ (CN¥2.3b - CN¥345m) (Based on the trailing twelve months to June 2024).

Therefore, South China Vocational Education Group has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 13%.

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'd like to look at how South China Vocational Education Group has performed in the past in other metrics, you can view this free graph of South China Vocational Education Group's past earnings, revenue and cash flow.

So How Is South China Vocational Education Group's ROCE Trending?

On the surface, the trend of ROCE at South China Vocational Education Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.3% from 7.4% five years ago. 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.

On a related note, South China Vocational Education Group has decreased its current liabilities to 15% 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.

The Bottom Line On South China Vocational Education Group's ROCE

While returns have fallen for South China Vocational Education Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 72% in the last three years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing: We've identified 4 warning signs with South China Vocational Education Group (at least 1 which is significant) , and understanding these would certainly be useful.

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

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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.