Should You Be Impressed By Dadi Early-Childhood Education Group's (GTSM:8437) Returns on Capital?

By
Simply Wall St
Published
November 10, 2020
GTSM:8437

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Dadi Early-Childhood Education Group's (GTSM:8437) trend of ROCE, we liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dadi Early-Childhood Education Group, this is the formula:

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

0.19 = NT$476m ÷ (NT$3.7b - NT$1.3b) (Based on the trailing twelve months to June 2020).

So, Dadi Early-Childhood Education Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 12% generated by the Consumer Services industry.

View our latest analysis for Dadi Early-Childhood Education Group

roce
GTSM:8437 Return on Capital Employed November 10th 2020

In the above chart we have measured Dadi Early-Childhood Education Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dadi Early-Childhood Education Group.

What Does the ROCE Trend For Dadi Early-Childhood Education Group Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 75% more capital into its operations. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 34% of total assets, this reported ROCE would probably be less than19% because total capital employed would be higher.The 19% ROCE could be even lower if current liabilities weren't 34% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Key Takeaway

To sum it up, Dadi Early-Childhood Education Group has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Dadi Early-Childhood Education Group does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Dadi Early-Childhood Education Group 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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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