Returns On Capital Signal Difficult Times Ahead For CL Educate (NSE:CLEDUCATE)

What underlying fundamental trends can indicate that a company might be in decline? 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. So after we looked into CL Educate (NSE:CLEDUCATE), the trends above didn't look too great.

Understanding 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. To calculate this metric for CL Educate, this is the formula:

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

0.049 = ₹136m ÷ (₹3.5b - ₹728m) (Based on the trailing twelve months to June 2022).

Thus, CL Educate has an ROCE of 4.9%. In absolute terms, that's a low return, but it's much better than the Consumer Services industry average of 2.4%.

Check out the opportunities and risks within the IN Consumer Services industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of CL Educate, check out these free graphs here.

How Are Returns Trending?

The trend of ROCE at CL Educate is showing some signs of weakness. To be more specific, today's ROCE was 7.3% five years ago but has since fallen to 4.9%. In addition to that, CL Educate is now employing 21% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a related note, CL Educate has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 CL Educate's ROCE

In summary, it's unfortunate that CL Educate is shrinking its capital base and also generating lower returns. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

CL Educate does have some risks though, and we've spotted 3 warning signs for CL Educate that you might be interested in.

While CL Educate may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.