The Returns At Navneet Education (NSE:NAVNETEDUL) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Navneet Education (NSE:NAVNETEDUL) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Navneet Education:

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

0.12 = ₹1.1b ÷ (₹13b - ₹3.9b) (Based on the trailing twelve months to June 2020).

Therefore, Navneet Education has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Media industry.

View our latest analysis for Navneet Education

In the above chart we have measured Navneet Education's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Navneet Education.

What Can We Tell From Navneet Education's ROCE Trend?

In terms of Navneet Education's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 36% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Navneet Education's ROCE

We're a bit apprehensive about Navneet Education because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Navneet Education you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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