Our Take On The Returns On Capital At Raffles Education (SGX:NR7)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Raffles Education (SGX:NR7) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Raffles Education is:

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

0.00017 = S$186k ÷ (S$1.3b - S$294m) (Based on the trailing twelve months to December 2020).

Thus, Raffles Education has an ROCE of 0.02%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.3%.

Check out our latest analysis for Raffles Education

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 Raffles Education, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Raffles Education doesn't inspire confidence. Around five years ago the returns on capital were 0.9%, but since then they've fallen to 0.02%. However it looks like Raffles Education might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Raffles Education has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Raffles Education's ROCE

In summary, Raffles Education is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last five years. Therefore based on the analysis done in this article, we don't think Raffles Education has the makings of a multi-bagger.

If you'd like to know more about Raffles Education, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Raffles Education isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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