China Education Group Holdings (HKG:839) Hasn't Managed To Accelerate Its Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating China Education Group Holdings (HKG:839), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

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

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

0.087 = CN¥2.5b ÷ (CN¥38b - CN¥8.9b) (Based on the trailing twelve months to February 2025).

Thus, China Education Group Holdings has an ROCE of 8.7%. On its own, that's a low figure but it's around the 9.6% average generated by the Consumer Services industry.

Check out our latest analysis for China Education Group Holdings

In the above chart we have measured China Education Group Holdings' 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 analyst report for China Education Group Holdings .

How Are Returns Trending?

The returns on capital haven't changed much for China Education Group Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 139% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On China Education Group Holdings' ROCE

As we've seen above, China Education Group Holdings' returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 70% in the last five years. Therefore based on the analysis done in this article, we don't think China Education Group Holdings has the makings of a multi-bagger.

Like most companies, China Education Group Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While China Education Group 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.

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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.