Returns On Capital Signal Tricky Times Ahead For China Liberal Education Holdings (NASDAQ:CLEU)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating China Liberal Education Holdings (NASDAQ:CLEU), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 China Liberal Education Holdings, this is the formula:

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

0.045 = US$1.9m ÷ (US$42m - US$1.2m) (Based on the trailing twelve months to June 2021).

Therefore, China Liberal Education Holdings has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.2%.

Check out our latest analysis for China Liberal Education Holdings

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 China Liberal Education Holdings, check out these free graphs here.

So How Is China Liberal Education Holdings' ROCE Trending?

On the surface, the trend of ROCE at China Liberal Education Holdings doesn't inspire confidence. Over the last three years, returns on capital have decreased to 4.5% from 16% three years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On China Liberal Education Holdings' ROCE

In summary, we're somewhat concerned by China Liberal Education Holdings' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 72% in the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

China Liberal Education Holdings does have some risks, we noticed 5 warning signs (and 2 which are significant) we think you should know about.

While China Liberal Education Holdings 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.