Are Investors Concerned With What's Going On At Overseas Education (SGX:RQ1)?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Overseas Education (SGX:RQ1), the trends above didn't look too great.

What is 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 Overseas Education is:

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

0.063 = S$16m ÷ (S$286m - S$28m) (Based on the trailing twelve months to June 2020).

So, Overseas Education has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.4%.

View our latest analysis for Overseas Education

Above you can see how the current ROCE for Overseas Education compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Overseas Education.

What Does the ROCE Trend For Overseas Education Tell Us?

There is reason to be cautious about Overseas Education, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Overseas Education becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Overseas Education we've found 4 warning signs (3 are a bit concerning!) that you should be aware of before investing here.

While Overseas Education 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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