We Like Grand Canyon Education's (NASDAQ:LOPE) Returns And Here's How They're Trending

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Grand Canyon Education (NASDAQ:LOPE) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Grand Canyon Education is:

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

0.36 = US$249m ÷ (US$785m - US$96m) (Based on the trailing twelve months to September 2022).

Thus, Grand Canyon Education has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 7.1%.

Our analysis indicates that LOPE is potentially undervalued!

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, you can check out the forecasts from the analysts covering Grand Canyon Education here for free.

What Does the ROCE Trend For Grand Canyon Education Tell Us?

We're pretty happy with how the ROCE has been trending at Grand Canyon Education. We found that the returns on capital employed over the last five years have risen by 36%. The company is now earning US$0.4 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 32% less capital to run its operation. Grand Canyon Education may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

What We Can Learn From Grand Canyon Education's ROCE

In the end, Grand Canyon Education has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 16% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

Grand Canyon Education is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.