Returns on Capital Paint A Bright Future For Grand Canyon Education (NASDAQ:LOPE)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Grand Canyon Education's (NASDAQ:LOPE) look very promising so lets take a look.

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 Grand Canyon Education, this is the formula:

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

0.32 = US$242m ÷ (US$863m - US$100m) (Based on the trailing twelve months to September 2023).

So, 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 7.6%.

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 to see what analysts are forecasting going forward, you should check out our free report for Grand Canyon Education.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Grand Canyon Education. The data shows that returns on capital have increased by 32% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Grand Canyon Education appears to been achieving more with less, since the business is using 36% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

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. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 40% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Grand Canyon Education looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether LOPE is currently trading for a fair price.

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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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.