China Education Group Holdings (HKG:839) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at China Education Group Holdings (HKG:839) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on China Education Group Holdings is:

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

0.07 = CN¥1.3b ÷ (CN¥25b - CN¥5.8b) (Based on the trailing twelve months to February 2021).

Therefore, China Education Group Holdings has an ROCE of 7.0%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 7.8%.

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'd like, you can check out the forecasts from the analysts covering China Education Group Holdings here for free.

What The Trend Of ROCE Can Tell Us

In terms of China Education Group Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.0%. 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.

The Bottom Line On China Education Group Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that China Education Group Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 34% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing China Education Group Holdings, we've discovered 4 warning signs that 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.

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.

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