Slowing Rates Of Return At Grand Canyon Education (NASDAQ:LOPE) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, while the ROCE is currently high for Grand Canyon Education (NASDAQ:LOPE), we aren't jumping out of our chairs because returns are decreasing.

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)

0.31 = US$235m ÷ (US$874m - US$120m) (Based on the trailing twelve months to March 2023).

Therefore, Grand Canyon Education has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 6.8% earned by companies in a similar industry.

Check out our latest analysis for Grand Canyon Education

Above you can see how the current ROCE for Grand Canyon Education compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grand Canyon Education.

SWOT Analysis for Grand Canyon Education

What The Trend Of ROCE Can Tell Us

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 33% in that same period. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. However, the business's operational efficiency is still impressive considering the ROCE is high in absolute terms.

Our Take On Grand Canyon Education's ROCE

Overall, we're not ecstatic to see Grand Canyon Education reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 12% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

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

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.