Zee Learn (NSE:ZEELEARN) Is Finding It Tricky To Allocate Its Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Zee Learn (NSE:ZEELEARN), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zee Learn is:

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

0.028 = ₹156m ÷ (₹10b - ₹4.5b) (Based on the trailing twelve months to September 2023).

Thus, Zee Learn has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 12%.

Check out our latest analysis for Zee Learn

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 Zee Learn's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Zee Learn Tell Us?

The trend of returns that Zee Learn is generating are raising some concerns. To be more specific, today's ROCE was 9.9% five years ago but has since fallen to 2.8%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 50% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Zee Learn's current liabilities have increased over the last five years to 45% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, it's unfortunate that Zee Learn is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 79% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Zee Learn does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Zee Learn 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.