Returns On Capital Signal Tricky Times Ahead For Raffles Education (SGX:NR7)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Raffles Education (SGX:NR7), it didn't seem to tick all of these boxes.

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. To calculate this metric for Raffles Education, this is the formula:

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).

Therefore, 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 7.3%.

See our latest analysis for Raffles Education

Historical performance is a great place to start when researching a stock so above you can see the gauge for Raffles Education's ROCE against it's prior returns. If you'd like to look at how Raffles Education has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

In terms of Raffles Education's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 0.9% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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. That could partly explain why the ROCE has dropped. 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.

Our Take On Raffles Education's ROCE

Bringing it all together, while we're somewhat encouraged by Raffles Education's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 45% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Raffles Education (including 1 which is concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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