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The Returns On Capital At Neusoft Education Technology (HKG:9616) Don't Inspire Confidence
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Neusoft Education Technology (HKG:9616), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Neusoft Education Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = CN¥273m ÷ (CN¥4.0b - CN¥979m) (Based on the trailing twelve months to June 2021).
Thus, Neusoft Education Technology has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 8.2%.
See our latest analysis for Neusoft Education Technology
Above you can see how the current ROCE for Neusoft Education Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Neusoft Education Technology here for free.
So How Is Neusoft Education Technology's ROCE Trending?
In terms of Neusoft Education Technology's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 9.0% from 22% three 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. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Neusoft Education Technology has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. 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
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Neusoft Education Technology. However, despite the promising trends, the stock has fallen 10% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Neusoft Education Technology (of which 1 makes us a bit uncomfortable!) that you should know about.
While Neusoft Education Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we're here to simplify it.
Discover if Neutech Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About SEHK:9616
Neutech Group
An investment holding company, provides education services in the People’s Republic of China.
Undervalued average dividend payer.
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