Be Wary Of CL Educate (NSE:CLEDUCATE) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at CL Educate (NSE:CLEDUCATE), we've spotted some signs that it could be struggling, so let's investigate.

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 CL Educate:

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

0.034 = ₹99m ÷ (₹3.9b - ₹927m) (Based on the trailing twelve months to June 2024).

Thus, CL Educate has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.6%.

Check out our latest analysis for CL Educate

Historical performance is a great place to start when researching a stock so above you can see the gauge for CL Educate's ROCE against it's prior returns. If you're interested in investigating CL Educate's past further, check out this free graph covering CL Educate's past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about CL Educate, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.5% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect CL Educate to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that CL Educate is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 565% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 3 warning signs facing CL Educate that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.