Should You Be Excited About Hailiang Education Group's (NASDAQ:HLG) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Hailiang Education Group (NASDAQ:HLG) looks great, so lets see what the trend can tell us.

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 Hailiang Education Group is:

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

0.25 = CN¥518m ÷ (CN¥3.8b - CN¥1.7b) (Based on the trailing twelve months to September 2020).

Therefore, Hailiang Education Group has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 7.4%.

View our latest analysis for Hailiang Education Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hailiang Education Group's ROCE against it's prior returns. If you're interested in investigating Hailiang Education Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Hailiang Education Group's ROCE Trending?

The trends we've noticed at Hailiang Education Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 165% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Hailiang Education Group has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Hailiang Education Group's ROCE

In summary, it's great to see that Hailiang Education Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Hailiang Education Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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