Grand Canyon Education (NASDAQ:LOPE) Is Achieving High Returns On Its Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Grand Canyon Education's (NASDAQ:LOPE) returns on capital, so let's have a look.

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 Grand Canyon Education, this is the formula:

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

0.32 = US$238m ÷ (US$833m - US$100m) (Based on the trailing twelve months to December 2022).

Thus, Grand Canyon Education has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 7.1%.

See our latest analysis for Grand Canyon Education

In the above chart we have measured Grand Canyon Education's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Grand Canyon Education here for free.

So How Is Grand Canyon Education's ROCE Trending?

Grand Canyon Education has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 22%. The company is now earning US$0.3 per dollar of capital employed. In regards to capital employed, Grand Canyon Education appears to been achieving more with less, since the business is using 31% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In Conclusion...

From what we've seen above, Grand Canyon Education has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 4.7% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Grand Canyon Education and understanding this should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.