Capital Allocation Trends At Ace Edulink (GTSM:6764) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, while the ROCE is currently high for Ace Edulink (GTSM:6764), we aren't jumping out of our chairs because returns are decreasing.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ace Edulink is:

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

0.32 = NT$195m ÷ (NT$1.2b - NT$592m) (Based on the trailing twelve months to June 2020).

Thus, Ace Edulink has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

View our latest analysis for Ace Edulink

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 Ace Edulink, check out these free graphs here.

So How Is Ace Edulink's ROCE Trending?

When we looked at the ROCE trend at Ace Edulink, we didn't gain much confidence. While it's comforting that the ROCE is high, two years ago it was 56%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Ace Edulink has done well to pay down its current liabilities to 49% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Ace Edulink is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Ace Edulink, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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