Tree House Education & Accessories (NSE:TREEHOUSE) Is Looking To Continue Growing Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Tree House Education & Accessories (NSE:TREEHOUSE) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tree House Education & Accessories is:

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

0.0047 = ₹9.9m ÷ (₹2.2b - ₹67m) (Based on the trailing twelve months to September 2023).

Therefore, Tree House Education & Accessories has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 11%.

Check out our latest analysis for Tree House Education & Accessories

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're interested in investigating Tree House Education & Accessories' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

It's great to see that Tree House Education & Accessories has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.5% on their capital employed. In regards to capital employed, Tree House Education & Accessories is using 43% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Tree House Education & Accessories could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 3.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

In a nutshell, we're pleased to see that Tree House Education & Accessories has been able to generate higher returns from less capital. And a remarkable 299% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Tree House Education & Accessories does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Tree House Education & Accessories 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.