Investors Met With Slowing Returns on Capital At Overseas Education (SGX:RQ1)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Overseas Education (SGX:RQ1) 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 Overseas Education:

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

0.064 = S$16m ÷ (S$294m - S$45m) (Based on the trailing twelve months to December 2020).

Thus, Overseas Education has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 8.0%.

Check out our latest analysis for Overseas 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'd like to look at how Overseas 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 Overseas Education's ROCE Trend?

There hasn't been much to report for Overseas Education's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Overseas Education in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Overseas Education's ROCE

In summary, Overseas Education isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 6.3% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 3 warning signs facing Overseas Education that you might find interesting.

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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